10 March 2017
This memo reports a 12-month forecast for the seasonally
adjusted Wisconsin unemployment rate. In addition to point forecasts (the
expected future value of the unemployment rate), the memo also reports 50% and
80% forecast intervals (probable ranges for future values).
The unemployment rate in January 2017 was 3.9%, down slightly
from 2016, though roughly constant since March 2015.
The forecasts are summarized in Figure 1 and Table 1. The
point forecast is for the unemployment rate to drop to 3.8% and stay steady through
September, with a slight increase at the end of 2017. The 80% forecast
intervals show that there is considerable additional uncertainty. There is a
possibility that the unemployment rate could increase as high as 5.2% by
December 2017. It is also possible that the unemployment rate could decrease,
to 3.2% by the end of 2017. The 50% forecast intervals refine this uncertainty,
showing that it is unlikely the unemployment rate will decrease below 3.5% over
the next year, or increase to over 4.5% by the end of 2017. Overall, the
forecast is for the unemployment rate to stay constant through August, and then
either stay constant or slightly increase at the end of the next year.
A 50% forecast interval is designed to contain the future
unemployment rate with 50% probability. It is just as likely for the rate to
fall in this interval as out of it. This is the smallest possible interval
which has even odds of containing the future rate. We can think of this
interval as “likely” to contain the future rate.
An 80% forecast interval is designed to contain the future
unemployment rate with 80% probability. We can think of this interval as
“highly likely” to contain the future rate. The 80% interval is designed so
that there is a 10% chance that the future value will be smaller than the
forecast interval, and a 10% chance that the future value will be larger than
the forecast interval.
To understand the economic reason behind these forecasts, the
econometric model finds one salient features. The state unemployment rate is
below its long-term average. Mean reversion predicts a slight increase,
accounting for an increase of about 0.25 over the upcoming year. Similarly the U.S. national unemployment rate is low,
accounting for an increase of about 0.25 over the upcoming year. The spread of
low-grade corporate bond yields over investment grade is lower than average,
accounting for a predicted decrease of about 0.3. Housing starts are below their long-term
average, accounting for a predicted decrease of 0.4. Building permits are also
below their long-term average, accounting for an increase of about 0.6 over the
upcoming year. The other variables contribute only small effects to the
forecast. Together, most of these effects offset so that the average impact is
quite small.
Figure 1: Wisconsin Unemployment Rate Forecasts
TABLE 1: Wisconsin
Unemployment Rate Forecasts
|
History |
Point Forecast |
50% Interval Forecast |
80% Interval Forecast |
2016:1 |
4.6% |
|
|
|
2016:2 |
4.6% |
|
|
|
2016:3 |
4.5% |
|
|
|
2016:4 |
4.4% |
|
|
|
2016:5 |
4.2% |
|
|
|
2016:6 |
4.2% |
|
|
|
2016:7 |
4.2% |
|
|
|
2016:8 |
4.2% |
|
|
|
2016:9 |
4.1% |
|
|
|
2016:10 |
4.1% |
|
|
|
2016:11 |
4.1% |
|
|
|
2016:12 |
4.1% |
|
|
|
2017:1 |
3.9% |
|
|
|
2017:2 |
|
3.8% |
(3.8%, 3.8%) |
(3.8%, 3.8%) |
2017:3 |
|
3.8% |
(3.7%, 3.8%) |
(3.6%, 3.9%) |
2017:4 |
|
3.8% |
(3.7%, 3.8%) |
(3.5%, 3.9%) |
2017:5 |
|
3.8% |
(3.6%, 3.9%) |
(3.5%, 4.0%) |
2017:6 |
|
3.7% |
(3.6%, 3.9%) |
(3.5%, 4.0%) |
2017:7 |
|
3.7% |
(3.6%, 3.9%) |
(3.4%, 4.0%) |
2017:8 |
|
3.7% |
(3.5%, 3.9%) |
(3.3%, 4.1%) |
2017:9 |
|
3.8% |
(3.5%, 4.0%) |
(3.3%, 4.3%) |
2017:10 |
|
3.9% |
(3.5%, 4.2%) |
(3.2%, 4.6%) |
2017:11 |
|
4.0% |
(3.5%, 4.3%) |
(3.2%, 4.9%) |
2017:12 |
|
4.1% |
(3.5%, 4.5%) |
(3.2%, 5.2%) |
2018:1 |
|
4.2% |
(3.6%, 4.7%) |
(3.1%, 5.5%) |
Previous Forecasts