20 August 2018
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 July 2013 was 2.9%, essentially
unchanged throughout 2018.
The forecasts are summarized in Figure 1 and Table 1. The
point forecast is for the unemployment rate to slowly rise to 3.5% by May 2019.
The 80% forecast intervals show that there is considerable additional
uncertainty. There is a possibility that the unemployment rate could decrease,
possibly as low as 2.6% by January 2019. It is also possible that the unemployment
rate could increase, to 4.9% by July 2019. The 50% forecast intervals refine
this uncertainty, showing that it is unlikely the unemployment rate will fall
over the next year, or increase over 4.1%. Overall, the forecast is for the unemployment
rate to increase..
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 over
the next year of about 1.0. Similarly, the U.S. national unemployment rate is
low, accounting for an increase of about 0.1 over the upcoming year. The yield
spread is low, accounting for an increase of 0.1 over the 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. Together, the net effect is a modest increase.
Figure 1: Wisconsin Unemployment Rate Forecasts
TABLE 1: Wisconsin
Unemployment Rate Forecasts
|
History |
Point Forecast |
50% Interval Forecast |
80% Interval Forecast |
2018:1 |
3.1% |
|
|
|
2018:2 |
2.9% |
|
|
|
2018:3 |
2.9% |
|
|
|
2018:4 |
2.8% |
|
|
|
2018:5 |
2.8% |
|
|
|
2018:6 |
2.9% |
|
|
|
2018:7 |
2.9% |
|
|
|
2018:8 |
|
3.0% |
(2.9%, 3.0%) |
|
2018:9 |
|
3.0% |
(3.0%, 3.1%) |
(2.9%, 3.0%) |
2017810 |
|
3.1% |
(3.0%, 3.2%) |
(2.9%, 3.2%) |
2018:11 |
|
3.2% |
(3.0%, 3.4%) |
(2.8%, 3.4%) |
2018:12 |
|
3.2% |
(3.0%, 3.5%) |
(2.7%, 3.7%) |
2019:1 |
|
3.3% |
(2.9%, 3.6%) |
(2.6%, 3.9%) |
2019:2 |
|
3.4% |
(3.0%, 3.7%) |
(2.6%, 4.1%) |
2019:3 |
|
3.4% |
(3.0%, 3.8%) |
(2.6%, 4.3%) |
2019:4 |
|
3.5% |
(3.0%, 3.9%) |
(2.6%, 4.5%) |
2019:5 |
|
3.6% |
(3.0%, 4.0%) |
(2.6%, 4.6%) |
2019:6 |
|
3.6% |
(3.0%, 4.1%) |
(2.6%, 4.8%) |
2019:7 |
|
3.6% |
(3.0%, 4.1%) |
(2.5%, 4.9%) |
Previous Forecasts