3 July 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%, down
significantly from 2016. The unemployment rate has fallen significantly each
month during 2017.
The forecasts are summarized in Figure 1 and Table 1. The
point forecast is for the unemployment rate to fall to 2.9% by July, stay
steady through January, and then increase during 2018 to 3.4% by May 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 April 2018. It is also possible that the
unemployment rate could substantially increase, to 4.6% by May 2018. The 50%
forecast intervals refine this uncertainty, showing that it is unlikely the
unemployment rate will decrease below 2.8% over the next year, or increase over
the current 3.1% before January. 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 0.40. 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 0.6 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 |
|
3.0% |
(2.9%, 3.0%) |
(2.9%, 3.0%) |
2017:7 |
|
2.9% |
(2.9%, 3.0%) |
(2.8%, 3.0%) |
2017:8 |
|
2.9% |
(2.8%, 3.0%) |
(2.7%, 3.1%) |
2017:9 |
|
2.9% |
(2.8%, 3.0%) |
(2.6%, 3.1%) |
2017:10 |
|
2.9% |
(2.8%, 3.1%) |
(2.6%, 3.2%) |
2017:11 |
|
3.0% |
(2.8%, 3.1%) |
(2.6%, 3.3%) |
2017:12 |
|
3.0% |
(2.8%, 3.2%) |
(2.6%, 3.4%) |
2018:1 |
|
3.0% |
(2.8%, 3.3%) |
(2.6%, 3.5%) |
2018:2 |
|
3.1% |
(2.8%, 3.4%) |
(2.5%, 3.8%) |
2018:3 |
|
3.2% |
(2.8%, 3.5%) |
(2.5%, 4.0%) |
2018:4 |
|
3.3% |
(2.8%, 3.7%) |
(2.4%, 4.3%) |
2018:5 |
|
3.4% |
(2.8%, 3.9%) |
(2.4%, 4.6%) |
Previous Forecasts