26 January 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 December 2016 was 4.0%, roughly
constant from May 2016, and roughly constant since March 2015.
The forecasts are summarized in Figure 1 and Table 1. The
point forecast is for the unemployment rate to stay steady for through August,
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 5.7% by December 2017. It is also
possible that the unemployment rate could decrease, to 3.3% by December 2017.
The 50% forecast intervals refine this uncertainty, showing that it is unlikely
the unemployment rate will decrease below 3.7% over the next year, or increase
to over 4.9%. Overall, the forecast is for the unemployment rate to stay
constant or slightly increase over 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 0.3 over the upcoming year. Similarly the
U.S. national unemployment rate is low, accounting for an increase of about 0.3
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 0.5. Building
permits are also below their long-term average, accounting for an increase of
about 0.7 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 |
4.0% |
|
|
|
2017:1 |
|
4.0% |
(3.9%, 4.0%) |
(3.9%, 4.0%) |
2017:2 |
|
4.0% |
(3.9%, 4.0%) |
(3.8%, 4.1%) |
2017:3 |
|
4.0% |
(3.9%, 4.1%) |
(3.8%, 4.1%) |
2017:4 |
|
4.0% |
(3.8%, 4.1%) |
(3.7%, 4.2%) |
2017:5 |
|
4.0% |
(3.8%, 4.1%) |
(3.7%, 4.2%) |
2017:6 |
|
4.0% |
(3.7%, 4.1%) |
(3.6%, 4.4%) |
2017:7 |
|
4.0% |
(3.7%, 4.2%) |
(3.5%, 4.5%) |
2017:8 |
|
4.0% |
(3.7%, 4.3%) |
(3.4%, 4.6%) |
2017:9 |
|
4.1% |
(3.7%, 4.4%) |
(3.4%, 4.9%) |
2017:10 |
|
4.2% |
(3.7%, 4.5%) |
(3.4%, 5.1%) |
2017:11 |
|
4.3% |
(3.7%, 4.7%) |
(3.3%, 5.4%) |
2017:12 |
|
4.3% |
(3.8%, 4.9%) |
(3.3%, 5.7%) |
Previous Forecasts