This post discusses my monthly update of the Barnichon-Nekarda model. For an introduction to the basic concepts used in this post, read my introductory post (Full details are available here.)
In August, the unemployment rate declined to 6.1%, as expected by last month’s forecast. Going forward, the contour of the forecast is broadly unchanged with a steady unemployment rate over the next 6 months. I anticipate the unemployment rate to be unchanged at 6.1% in October and still at 6.0% by March 2015.
This model’s forecast can be easily understood by looking at the projected behavior of the “steady-state” unemployment rate. The steady-state unemployment rate, the rate of unemployment implied by the underlying labor force flows—the blue line in figure 2— stands currently at 6.0%, just 0.1% lower than the actual unemployment rate. Our research shows that the actual unemployment rate converges toward this steady state. With a steady-state unemployment rate only marginally below the actual rate, there is little “steady-state convergence dynamic” pushing the unemployment rate down going forward. Moreover, the steady-state unemployment rate (SSUR) is expected to decline only slowly over the coming month with a steady-state rate of 5.8% by the end of the year (figure 2). All in all, there is little downward momentum developing on the unemployment rate front.
To forecast the behavior of steady-state unemployment, the model propagates forward its best estimate for how the flows in and out of unemployment will evolve over time. The two most important flows –workers’ job finding rate (UE) and workers job separation rate (EU)—have been behaving slightly less well than predicted by the model (figure 3 and 4), and in consequence, their forecasts have been revised slightly downward. This revision explains the slightly less upbeat forecast this month compared to last month.
To read more about the underlying model and the evidence that it outperforms other unemployment rate forecasts, see Barnichon and Nekarda (2012).