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Unseasonal Seasonals?

Unseasonal Seasonals?

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A Fall 2013 BPEA paper by Jonathan H. Wright

A sharp downturn in the economy, like that experienced recently, has distorted government statistics. The problem is that the procedures used to correct raw data for seasonal fluctuations can too easily confuse the downturn with a change in seasonality. Indeed, this is a more general problem. The author shows that the statistical authorities would produce more useful economic data if they adjusted their seasonal adjustment procedures to constrain seasonal factors to vary less over time than current practice. The paper has important implications for how to interpret month-to-month movements in all of our major economic time series.
A Fall 2013 BPEA paper by Jonathan H. Wright

A sharp downturn in the economy, like that experienced recently, has distorted government statistics. The problem is that the procedures used to correct raw data for seasonal fluctuations can too easily confuse the downturn with a change in seasonality. Indeed, this is a more general problem. The author shows that the statistical authorities would produce more useful economic data if they adjusted their seasonal adjustment procedures to constrain seasonal factors to vary less over time than current practice. The paper has important implications for how to interpret month-to-month movements in all of our major economic time series.

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Published by: Brookings Institution on Feb 07, 2014
Copyright:Attribution Non-commercial

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02/10/2015

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Jonathan H. Wright, Johns Hopkins University
Final Conference Draft to be presented at the Fall 2013 Brookings Panel on Economic Activity September 19-20, 2013
 
 
Unseasonal Seasonals?
Jonathan H. Wright
First Version: July 21, 2013This version: September 8, 2013
Abstract
In any seasonal adjustment filter, some cyclical variation will be mis-attributed toseasonal factors and
 vice-versa 
. The issue is well known, but has resurfaced since thetiming of the sharp downturn during the Great Recession appears to have distortedseasonals. In this paper, I find that initially this effect pushed reported seasonallyadjusted nonfarm payrolls up in the first half of the year and down in the second half of the year, by a bit more than 100,000 in both cases. But the effect declined in lateryears and is quite small at the time of writing. In addition, I make a case for usingfilters that constrain the seasonal factors to vary less over time than the default filtersused by US statistical agencies, and also for using filters that are based on estimationof a state-space model. Finally, I report some evidence of predictability in revisions toseasonal factors.
Department of Economics, Johns Hopkins University, 3400 North Charles St. Baltimore, MD 21218
wrightj@jhu.edu
. I am grateful to Bob Barbera, Jon Faust, Eric Ghysels, Jurgen Kropf, Kurt Lewis, ElmarMertens, David Romer, Richard Tiller, Justin Wolfers and Tiemen Woutersen for very helpful commentsand suggestions. All errors are my sole responsibility.
 
1 Introduction
In most macroeconomic data, there is substantial regular variation associated with the time of year, coming from the weather, vacations, or other sources. Overlooking the regular nature of this variation would obscure longer-term trends and business cycle variation. Consequently,statistical agencies generally report seasonally adjusted data, that aims to purge the effectof this regular variation.Conceptually, the definition of seasonal adjustment is purging any variation in economicdata that is predictable using the calendar alone. This includes effects associated with thetime of year, but also factors such as the timing of Easter, or the number of business daysin a month. But it does not, in particular, include variation in economic data that owesto the deviation of weather from the norms for that time of year. What makes estimationof seasonal effects difficult is that they can change over time. For example, the rise of airconditioning changed the peak of electricity demand from the winter to the summer (this is,for example, documented in Energy Efficient Strategies (2005)). Demographic trends affectthe number of school- and college-age people, who seek employment primarily during thesummer. Climate change may also affect seasonal patterns. If seasonal effects were constantover time, then econometricians could eventually learn the “trueseasonal patterns. Butgiven that seasonal effects vary over time, the seasonal factor is an unobserved componentthat can be estimated, but never perfectly identified.There are two broad approaches that are generally used to undertake seasonal adjustment.One approach tracks the seasonal component in a time series by a moving average of theseries in the same period in different years. This is the idea in the Bureau of the CensusX-12 ARIMA seasonal adjustment methodology. Henceforth in this paper, I will refer to thisas the “X-12” filter. This methodology involves first using a time series model to forecastand backcast the series, and then applying the moving average approach to the resultingextended series. The algorithm is described in the appendix to this paper and in more detailin Findley et al. (1998) and Ladiray and Quenneville (1989). An alternative is to write downa model decomposing a series into components (such as trend, seasonal and irregular) and toestimate this via the Kalman filter. The TRAMO-SEATS program, developed at the Bankof Spain (G´omez and Maravall, 1996), is an example of a model-based methodology. US andCanadian statistical agencies generally use the X-12 filter, and this will be my main focus in1

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