Wisconsin
Unemployment Rate Forecast
Bruce E. Hansen
Mary Claire Aschenbrenner
Phipps Distinguished Chair
T. Haavelmo Professor
Department of
Economics
University of Wisconsin
10 August 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 May 2017 was 3.1% roughly constant
since April, but down significantly from 2016. The unemployment rate fell
significantly during 2017.
The forecasts are summarized in Figure 1 and Table 1. The
point forecast is for the unemployment rate to remain steady at 3.1% for the
remainder of 2017, and then rise during the first half of 2018 to 3.5% by June
2018. The 80% forecast intervals show that there is considerable additional uncertainty.
There is a possibility that the unemployment rate could continue to decrease,
possibly as low as 2.4% by June 2018. It is also possible that the unemployment
rate could substantially increase, to 4.8% by June 2018. The 50% forecast
intervals refine this uncertainty, showing that it is unlikely the unemployment
rate will decrease below 2.9% over the next year, or increase over 4.0% within
the next year. Overall, the forecast is for the unemployment rate to stay
roughly constant or potentially increase during 2018.
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 the following salient features. The state unemployment
rate is below its long-term average. Mean reversion predicts an increase of
about 0.50. Similarly, the U.S. national unemployment rate is low, accounting
for an increase of about 0.20 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 0.6. Building permits are also below their long-term
average, accounting for an increase of about 0.5 over the upcoming year. The
other variables contribute only small effects to the forecast. Together, most
of these effects offset with the net effect of a short-term decrease followed
by a modest increase.
Figure 1: Wisconsin Unemployment Rate Forecasts
TABLE 1: Wisconsin
Unemployment Rate Forecasts
|
|
History |
Point Forecast |
50% Interval Forecast |
80% Interval Forecast |
|
2017:1 |
3.9% |
|
|
|
|
2017:2 |
3.7% |
|
|
|
|
2017:3 |
3.4% |
|
|
|
|
2017:4 |
3.2% |
|
|
|
|
2017:5 |
3.1% |
|
|
|
|
2017:6 |
3.1% |
|
|
|
|
2017:7 |
|
3.1% |
(3.0%, 3.1%) |
(3.0%, 3.1%) |
|
2017:8 |
|
3.1% |
(3.0%, 3.2%) |
(3.0%, 3.2%) |
|
2017:9 |
|
3.1% |
(3.0%, 3.2%) |
(2.9%, 3.3%) |
|
2017:10 |
|
3.1% |
(3.0%, 3.3%) |
(2.8%, 3.4%) |
|
2017:11 |
|
3.1% |
(2.9%, 3.3%) |
(2.7%, 3.5%) |
|
2017:12 |
|
3.2% |
(2.9%, 3.4%) |
(2.7%, 3.6%) |
|
2018:1 |
|
3.2% |
(2.9%, 3.5%) |
(2.7%, 3.8%) |
|
2018:2 |
|
3.3% |
(2.9%, 3.6%) |
(2.6%, 3.9%) |
|
2018:3 |
|
3.3% |
(2.9%, 3.6%) |
(2.6%, 4.1%) |
|
2018:4 |
|
3.4% |
(2.9%, 3.7%) |
(2.6%, 4.2%) |
|
2018:5 |
|
3.4% |
(2.9%, 3.8%) |
(2.5%, 4.5%) |
|
2018:6 |
|
3.5% |
(2.9%, 4.0%) |
(2.4%, 4.8%) |
Previous Forecasts