Seasonal Adjustment

Seasonal adjustment of time series is mainly the

isolation of seasonal fluctuations. It consists of the
identification, estimation and removal of seasonal
variations and effect of trading days and moving
holidays (if present) from a time series.

After removal of seasonal variations, the resulting

series is referred to as seasonally adjusted series or
deseasonalized series.

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Why is seasonal adjustment done?

Seasonal adjustment is done to simplify data so that
they may be more easily interpreted by statistically
unsophisticated users without a significant loss of
information. (Bell and Hellmer, 1992)

Seasonal adjustment is mainly carried out for policy

makers or advisers who wish to be able, at a glance,
to read the trend of an economic time series without
being hampered by seasonal movements.

In the study of business cycles, seasonal adjustment is

essential when we want to estimate the trend-cycle
component.
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Example of Actual and Its Seasonally Adjusted Series

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Tests for Seasonality

Seasonality can be detected graphically, using multiple
line charts. However, in cases where presence of
seasonality is not clearly seen through visual
inspection, there are two commonly used statistical
tests for detecting presence of seasonality: the
Kruskal-Wallis test and the F-test based on the
analysis of variance using a linear regression model.

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Decomposition of Time Series

An observed time series, yt, can be decomposed into four
components namely: trend (ytt), cycle (ytc), seasonality (yts), and
irregularity (yti). For short series, it is difficult to disaggregate
the cycle from the trend and the two components are combined
into the trend-cycle (yttc) component. Two decomposition
models are commonly used in relating the observed value with
its four components.
a. Additive Model:
b. Multiplicative Model:

yt = yttc + yts + yti

yt = yttc x yts x yti

Two other available decompositions are the log additive and the
pseudo-additive decompositions, with the latter defined as,
yt = yttc x (yts + yti 1)
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Multiplicative vs. Additive Decomposition

When the parameters describing the time series are not

changing over time, the time series can be modeled
adequately by the additive decomposition method. An
example is the unemployment rate.

When the time series exhibits increasing seasonal variation,

then the appropriate model is the multiplicative model. An
example is the number of tourist arrivals.

The bulk of economic time series handled by the U.S. Bureau

of Census and the U.S. Bureau of Labor Statistics are adjusted
using multiplicative decomposition. The Federal Reserve uses
the additive version more frequently because of the nature of
the time series it treats.
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Example of Quarterly Data Showing Seasonality

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Example of Monthly Data Showing Seasonality

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Decomposition of Time Series

Since the values of the components of the observed series are

not known, these are estimated.

A series of less than 30 years of data is usually considered

short when the purpose is to estimate the cycle.

To do seasonal adjustment, it is suggested that 5 to 15 years of

data points be used. This is to ensure that sufficient data is
available to estimate the seasonal component.

A more complete decomposition includes trading day

variations (yttd) and Easter or moving holiday effects (ytE) and
with yti partitioned into well-behaved noise (yti) and extreme
values (et).

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Decomposition of Time Series

The more complete models are,

for additive decomposition, and

for multiplicative decomposition.

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Decomposition of Time Series

The seasonally adjusted series for the additive model is,

For the multiplicative model, the seasonally adjusted series is,

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Trend-Cycle Component or Seasonally Adjusted

For series which exhibits much irregularity, and

consequently with et dominating it, an alternative
series to ytadj is the trend-cycle component, yttc.

The trend-cycle component, yttc, will show the trends

without being hampered not just by seasonality but
also by the high irregularity.

For short term indicators, most analysts prefer the

trend-cycle estimates than seasonally adjusted
estimates.

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Decomposition Process
X11 and X12

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Some Common Procedures for

Seasonal Adjustment
The majority of seasonal adjustment procedures being used
are based on univariate techniques and estimation of the
components of a time series is done in a simple automatic
manner.
Two broad classifications of seasonal adjustment methods
are:
a) those based on regression and linear estimation
theory; and
b) those based on the application of linear smoothing
filters or moving averages.
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Seasonal Adjustment Procedures

Most statistical agencies use methods based on

moving averages for seasonal adjustment.

The two most commonly used are the U.S. Bureau

of Census X11-Method II Variant and Statistics
Canadas X11 ARIMA.

These two methods follow an iterative estimation

procedure involving the major steps in the
decomposition of a time series.

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Main Steps in X11 ARIMA (Version 2000)

X11 ARIMA uses the Census X11 procedure on augmented data the time series plus one year of monthly or quarterly forecasts and
one year of backcasts from an ARIMA model. The X11 ARIMA
basically consists of:
a)

modeling the original series using an ARIMA or Box-Jenkins Model;

b)

forecasting one year of unadjusted data at each end of the series from
ARIMA models that fit and project the original series well; and

c)

seasonally adjusting the augmented series using X11-Method II

variant.

The Easter and trading-day adjustments are applied even before a)

is done if one asks for it.

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TRAMO-SEATS
TRAMO - Time Series Regression with ARIMA Noise,
Missing Observations, and Outliers
SEATS - Signal Extraction in ARIMA Time Series

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TRAMO

A program for estimation and forecasting regression

models with possibly non-stationary (ARIMA) errors
and any sequence of missing values.

The program interpolates these values, identifies and

corrects for several types of outliers, and estimates
special effects such as Trading Day and Easter and
intervention variable type of effects.

Fully automatic model identification and outlier

correction procedures are available.

The program can pre-test for the level v. log

specification.
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SEATS

A program for estimation of unobserved components in

time series following the Auto-Regressive Integrated
Moving Average model based method.

The Trend, Seasonal, Irregular, and cyclical

components are estimated and forecasted with signal
extraction techniques (Kalman Filter) applied to
ARIMA models.

In Seasonal Adjustment, TRAMO pre-adjusts the series

to be adjusted by SEATS.

TRAMO-SEATS Program is due to Victor Gomez and

Agustin Maravall
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X12 and TRAMO/SEATS

X12

and TRAMO/SEATS are seasonal adjustment

procedures based on extracting components from a given
series.

X12

uses a non-parametric moving average based method

to extract its components. TRAMO/SEATS bases its
decomposition on an estimated parametric ARIMA model.

The

main difference between the two methods is that X12

does not allow for missing values while TRAMO/SEATS
will interpolate the missing values based on an estimated
ARIMA model.
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Hodrick-Prescott Filter - Permanent Component

This

is a smoothing method that is widely used among

macroeconomists to obtain a smooth estimate of the longterm trend component of a series. The method was first
used in a working paper (circulated in the early 1980's and
published in 1997) by Hodrick and Prescott to analyze
postwar U.S. business cycles.

The

Hodrick-Prescott (HP) filter computes the permanent

component (TRt) of a series yt by minimizing the variance
of yt around TRt, subject to a penalty that constrains the
second difference of TRt.
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Hodrick-Prescott Filter - Permanent Component

That is, the HP filter chooses TRt to minimize:

is the penalty parameter that controls for the

smoothness of the series. The default values for are:

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Hodrick-Prescott Filter - Permanent Component

parameter controls for the smoothness of the
series, by controlling the ratio of the variance of the
cyclical component and the variance of the series.

The

larger the , the smoother the TRt approaches

the linear trend.

The

King

and Rabelo (1993) showed that the HP filter

can render stationary any integrated process of up to
the fourth order.

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Hodrick-Prescott Filter - Permanent Component

The HP has some disadvantages. Harvey and Jaeger (1993)

showed that the use of HP filter can lead to identification of
spurious cyclical behavior.

Moreover, users of HP filter should not be interested in data

points near the beginning or the end of the sample. Baxter and
King (1995) recommended that three years of data be dropped
at both ends of the time series when the HP filter is applied
for quarterly or annual data.

Other extraction procedures: Baxter and King; Christiano and

Fitzgerald;

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