Forecasting the U.S. and Wisconsin Economies in 2021

RESEARCH REPORT: JANUARY 19, 2021
BY: JUNJIE GUO AND NOAH WILLIAMS

Abstract
This paper provides forecasts for the United States and Wisconsin economies in 2021. The economic disruptions caused by the COVID-19 pandemic have made forecasting difficult. To deal with the volatility caused by the shutdowns and reopening requires modifying standard procedures. For each economy, we first estimate a mixedfrequency vector auto-regression model using data before the pandemic started in March 2020, and then use estimated model to forecast each variable forward by taking the data since March 2020 as given. We forecast that both economies will continue to recover in 2021. However, the recovery will be slower than it was in the second half of 2020, and most economic indicators may not reach their pre-pandemic levels by the end of 2021. For the U.S. economy, we forecast that the year-over-year growth rate of real GDP will reach about 2.9%, personal consumption expenditures will grow by about 4.5%, inflation will remain below 2%, the unemployment rate will drop to about 5.7%, the economy will add about 3.3 million nonfarm jobs, and the average hourly earnings will increase by about 2.4%. For the Wisconsin economy, we forecast that the year-over-year growth rate of real GDP will reach about 3.0%, the unemployment rate will drop to about 4.2%, and the economy will add about 122 thousand nonfarm jobs. We project that the manufacturing sector will experience a faster recovery than the overall economy, and both economies face significant uncertainties. There is a significant chance that both economies will grow by 5% or more, but also a significant chance that both economies will grow by 1% or less.

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