Wisconsin Unemployment Rate Forecast

University of Wisconsin

1 April 2016

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 February 2016 was 4.6%, unchanged for the third month, 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 slowly increase for the next year, to 5.2% by February 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 6.4% by February 2017. It is also possible that the unemployment rate could decrease, to 4.1% by the February 2017. The 50% forecast intervals refine this uncertainty, showing that it is unlikely the unemployment rate will decrease, or increase to over 5.5% by the end of 2016. Overall, the forecast is for the unemployment rate to increase of the next year, at least mildly and possibly significantly.

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 two salient features. First, the state unemployment rate is below its long-term average. Mean reversion predicts a slight increase, accounting for an increase of about 0.4 over the upcoming year. Second, the market premium on high-yield bonds is higher than average, which also predicts an increase in the unemployment rate, accounting for an increase of about 0.2 over the next year. The other components in the econometric model have only minor impacts on the current forecast.

Figure 1: Wisconsin Unemployment Rate Forecasts

TABLE 1: Wisconsin Unemployment Rate Forecasts

 History Point Forecast 50% Interval Forecast 80% Interval Forecast 2015:9 4.3% 2015:10 4.3% 2015:11 4.3% 2015:12 4.6% 2016:1 4.6% 2016:2 4.6% 2016:3 4.6% (4.6%,  4.6%) (4.6%,  4.9%) 2016:4 4.6% (4.6%,  4.7%) (4.5%,  4.7%) 2016:5 4.7% (4.6%,  4.8%) (4.4%,  4.9%) 2016:6 4.8% (4.6%,  4.9%) (4.4%,  5.1%) 2016:7 4.8% (4.6%,  5.0%) (4.4%,  5.2%) 2016:8 4.9% (4.6%,  5.1%) (4.4%,  5.4%) 2016:9 4.9% (4.6%,  5.2%) (4.4%,  5.5%) 2016:10 5.0% (4.6%,  5.3%) (4.3%,  5.7%) 2016:11 5.1% (4.7%,  5.4%) (4.3%,  5.9%) 2016:12 5.1% (4.7%,  5.5%) (4.3%,  6.1%) 2017:1 5.2% (4.6%,  5.6%) (4.2%,  6.3%) 2017:2 5.2% (4.6%,  5.8%) (4.1%,  6.4%)

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