Cybernetics and Systems Analysis, Vol. 34, No.

3, 1998

SEASONAL ADJUSTMENT OF SOME ECONOMIC INDICATORS

S. B. Kurilenko UDC 65.912

Economists often analyze time series to detect various regularities in input data. Each element of such time series is
observed at a certain time instant or in a certain time interval. The elements of a time series are naturally of comparable
nature. Time series of economic indicators are shaped by the combined effect of numerous long-term or short-term factors,
9
including various chance factors, but it is impossible to separate the effect of each individual factor. As a result, the overall
.

evolution of the indicator is linked with the flow of time, and not with any particular factor. Changes in the evolution
conditions of a phenomenon lead to a more or less pronounced change in the factors themselves, a change in the strength and
impact of their action, and in the final account a change in the level of the observed phenomenon over time. The variable
"time" is thus assumed to represent the effect of all main factors.
The purpose of this article is to identify the underlying long-term trend in the evolution of some indicator over time
and to find its periodic (seasonal) variations. The notion of evolutionary trend is quite imprecise. In statistical literature [1-3]
trend usually signifies a general direction of change, long-term evolution. Trend is represented by some curve that
corresponds to a particular function of time. This trend curve captures the main regularities of motion over time and to a
certain extent (although not completely) is free from random factors affecting the particular indicator. The trend curve
describes some "averaged" evolution as observed over a sufficiently long period. Sometimes the trend is represented as a
deterministic component of the observed variable (while the variation of this component is not necessarily related with time).
Deviation from the trend is regarded as a random variable.
We will try to explain the generating mechanism of the observed time series and identify its various components.
This is often the basis for statistical forecasting, which in most cases reduces to extrapolation of the detected trend. This
approach to forecasting relies on the following assumptions: 1) the evolution 9 a phenomenon can be adequately
characterized by its trend, representing the evolutionary path; 2) the general conditions that determine the past trend will
remain essentially unchanged in the future. Extrapolation thus provides a description of some general future development of
the observed system in cases when there is reason to expect a certain inertial behavior and the hypotheses about future
development may be largely based on an analysis of the past.
In practice, analysis and forecasting of various economic indicators are often based on time-series models, so that
economists mostly deal with information that leaves much to be desired in terms of the main statistical requirements
(homogeneity of the data, existence of a distribution, etc.). Finally, the absence of alternative information other than the
observed time series is often of decisive importance in choosing a particular research methodology. If there are doubts about
"experimental purity" in the above-mentioned sense, the statistical inference should be approached with caution. At the same
time, this inference is quite useful for practical purposes, and in particular for economic decisions.
Smoothing provides one of the most widespread and simplest approaches to time series description and trend
detection. The various smoothing techniques replace the actual observations with calculated values, which have much smaller
variability than the observations. Reduction of variability makes it possible to detect the trend of the relevant indicator with
greater visual clarity.
Linear filters are a common practical tool for smoothing. The general formula of a linear filter is

"E
$

Yt = arYt + r,
r .~ --q

Translated from Kibernetika i Sistemnyi Analiz, No. 3, pp. 177-183, May-June, 1998. Original article submitted
May 5, 1997.

472 1060-0396/98/3403-0472520.00 9 Plenum Publishing Corporation

 Real GDP 6

,' , , 9 , , 9 9 9 , , 9 , " , , , , 9 ,' , 9 , , 9 9 9 9 , 'l , , 9 9 ', , ,

o o o o ~ ,- o N ~ ~ ~ ,- o o" ~ N N --'- o'-

Date
Fig. 1

where Yt is the smoothed (filtered) value at time t; a r is the weight assigned to the observation at distance r from time t. The
filter encompasses s observations after the time t and q observations before the time t. The simplest example of a linear filter
is provided by moving averages. Here E a r = 1, a r = const, and the filter produces the (arithmetic) mean. The longer the
smoothing interval, the stronger is the averaging of the observations and the more pronounced is the smoothing of variability.
The result is a smoother trend. Another technique uses weighted moving averages. In this case, each observation within the
smoothing interval is assigned a weight that depends on the distance of the given observation from the midpoint of the
smoothing interval. For instance, the weights may be calculated as binomial terms in the expansion of a unit sum raised to
the power of 2p (taking the decomposition 1 = 1/2 + 1/2); a different decomposition of the unit can be chosen, but this one
is preferable because of its symmetry relative to the end points.
The filters considered above are symmetrical. Asymmetric filters also can be used to forecast the statistical trend.
The simplest asymmetrical filter is a moving average that replaces the last (instead of the central) observation in the
smoothing interval. More popular, however, are filters that allow for the "aging" of the data. The Holt-Winter method is
particularly popular for forecasting trends. Observation t + 1 is extrapolated by this method as

Yt + 1 Qt'

Qt = aYt + (1 - a)(Q t _ 1 + R t - 1 ) ,

R t = b(Qt- Qt-l) + (1 -- b)R t _ l ,

where Yt are the observations in the time series, Qt = aYt + a(1 - a)Yt_ 1 + a(1 - a ) 2 Y t _ 2 + .... a, b = const, a, b < 1.
Let us detect the trend of some economic indicator by methods of time-series analysis. The seasonality has to be
removed from the time series, so as to obtain the trend and the seasonal component separately. Various methods are available
for seasonal adjustment of time series (Census 2, Census 10, and others [1, 3, 4]), but they all are quite complex and time-
consuming. Let us consider the main idea underlying many of the seasonal adjustment methods, which often produces good
results.
To perform seasonal adjustment, we represent the time series Yt as a product of four components:

Y t = L x S x C x I,

where L is the long-term "secular" trend, S is the seasonal component, C is the cyclic (long-term) component, and I is the
irregular (random) component.
To eliminate the component S, we need to identify the long-term components L x C. This cannot be accomplished
exactly, and we therefore eliminate (as far as possible) the random and seasonal components S x I from the original time
series Y r If the time series consists of monthly data, we calculate the 12-month moving average

Ill

Y t = (Yt + 6 + Yt + 5 + . . . + Yt + Y t _ l + . . . + Yt - 5) / 1 2 .

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 TABLE 1

Real GDP, 12-Month

million hrivny, Sxl .Se~.onality Seasonally
Time moving
Dec. 1993 % ) 9adjusted time
average (Yt) (zt)
prices 0't) . series (Yt)

0L94 300,0 -- -- 0,84 357,0

02.94 295,0 -- -- 0,80 370,3
03.94 318,5 -- -- 0,86 370,5
04.94 362,7 -- -- 0,85 425,2
05.94 345,7 -- -- 0,87 399,2
06.94 385,5 404,8 0,95 0,92 419,3
07.94 492,5 406,8 1,21 LI1 442,9
08.94 433,7 406,9 I.,07 1,13 384,4
09.94 492,7 406,2 1,21 1,16 425,5
10.94 524,1 400,3 1,31 1,26 414,3
1194 492,1 396,6 1,24 1,21 406,9
12.94 41.5,5 392,6 1,06 1,10 377,0
0L95 324,2 384,2 0,84 0,84 385,8
02.95 295,3 383,0 0,77 0,80 370,6
03.95 310,0 374,1 0,83 0,86 360,7
04.95 292,9 366,1 0,80 0,85" 343,3
05.95 301,1 359,3 0,84 9,87 347,8
06.95 336,7 357,5 0,94 0,92
07.95 391,6 354,1 I.,ii 1,11 3522
08.95 419,2 352,1 1,19 1,13
09.95 386,5 350,4 UO U6 333,8
10.95 427,6 350,3 1,22 1,26 338,1
11.95 410,9 ~348,8 1,18 1,21 339,7
12.95 393,8 343,7 1,15 1,10 357,4
0L96 282,9 338,1 034 034 336,6
02.96 271,4 329,9 0,82 0,80 340,5
03.96 290,5 326,2 0,89 0,86 337,9
04.% 2915 321,7 0,91 0,85 341,7
05.% 282,5 316,1 0,89 0,87 326,3
06.96 276,1 319,5 036 0,92 300,3
07.% 323,9 317,7 1,02 1,11 291,2
08.96 321,3 -- -- 143 z~3
09.96 342,1 -- -- 1,16 295,.5
10.96 373,8 --- --- 1'26 295,5
11.96 343,7 -- -- 1,21 284,,2
12.96 433,8 -- -- UO 393,6
01.97 261,8 , -- -- , 0,84 3Ur6

The s m o o t h e d series Yt is relatively free from seasonal and r a n d o m fluctuations and m a y be used as an estimate o f
L x C. W e n o w divide the original time series by the estimate o f L x C to obtain the seasonal and r a n d o m c o m p o n e n t s S x
I:

ql
( L X S X C X l) / (L x C) = S x I = Y t / y t = z r

The next step is to eliminate the r a n d o m c o m p o n e n t I, as far as possible, and thus identify the seasonal c o m p o n e n t S.
W e calculate the m e a n values o f S x I corresponding to the same months:

1
z i' = ~ ( ~ + z~ 3 + z2s),
,.........,.....,...,

1
z {'2 = ~" (z~ 2 + ~ 4 + za6).

IIc ,

The series consisting o f z I -z12 is the seasonal c o m p o n e n t of the o b s e r v e d e c o n o m i c indicator. T o obtain the
lit
seasonally adjusted f o r m o f the original time series, we f o r m the ratio ytlzt = Y t , eliminating the seasonal c o m p o n e n t and
retaining the three other c o m p o n e n t s .

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 Seasonality of r.ea!GDP
1.30.
1.20.

1.109
1.00.
S
0.90-

0.80 ~
0.70
i;i;6i 8 9 10 il i2
Months

Fig. 2
Seasonally adjusted real GDP
45O

400

350

250

, , , , , , , , , , , . ' , , , , . . . . .
200 9 . . . . , . . . . . . . . . , , 9

0 0 0 ~ 0 0 Time

Fig. 3

We should again stress that this method does not guarantee complete removal of the seasonal component from the
original time series. However, it produces satisfactory results.
As an example consider the time series of the real GDP of Ukraine (Fig. 1). The real GDP is subjected to
considerable seasonal fluctuations, and we will try to separate the trend and the seasonal component of this indicator.
Problems with completeness and accuracy of this macroeconomic indicator are well-known. They include the large
shadow economy, which according to some estimates is comparable with the officially observed economy, as well as
imperfection of the data attributable to the old accounting system, unrealistic values of enterprise assets and inventories,
incorrect depreciation calculations, etc.
In addition to these weaknesses, transition economies often suffer from underreporting of business activity and
general economic state of the agents (contrary to the tendency to overreport in a centrally planned system in order to secure
greater allocations from the state). The tendency to underreport is motivated by the desire to avoid taxes and to secure
government support; it is also a manifestation of increasing "shadowization" of the economy. A major difficulty for the
determination of the GDP trend and the possibility of its forecasting, however, is the variability of the officially observed part
of the GDP, and not so much the scale of its relative value: it is difficult to assess if the observed changes in the officially
recorded component are attributable to actual growth (or decline) of the total GDP, or perhaps mainly to redistribution
between the official component and the shadow economy.
The real GDP was calculated month by month by deflating the official data for the nominal GDP to constant
December 1993 prices (this is a fairly crude estimate, since GDP is calculated in official statistics as a cumulative total). The
GDP deflator was determined by weighting both consumer and wholesale prices:

GDPD = 0.7CPI + 0.3WPI,

where GDPD is the GDP deflator, CPI is the consumer price index, and WPI is the wholesale price index.
The data for GDP, CPI, and WPI were taken from the statistical bulletins of the Ministry of Statistics of Ukraine [5].
The time period considered in this research was from January, 1994 to January, 1997. Table 1 reconstructs the sequence of
operations for seasonal adjustment of the real GDP.

475
 The second column in Table 1 presents the calculated real GDP. The third column is the smoothed time series based
on the 12-month moving average. The fourth column gives the calculated seasonal and random components. The seasonality
and the seasonally adjusted real GDP are presented in fifth and sixth columns. Figures 2 and 3 plot the seasonal component
and the seasonally adjusted real GDP. There is a clear picture of decliningproduction during the observed time period
(official data of the Ministry of Statistics of Ukraine report a decline of 11.8% in 1995 and 10% in 1996).
It is interesting to consider the "behavior" of seasonality (Fig. 2). The GDP peaks in month 10 (this is associated
with production and processing of agricultural commodities, and also completion of construction projects). The large relative
value of real GDP in the last month (dais is particularly noticeable in December 1996, Fig. 3) is also due to the fact that the
Ministry of Statistics estimates the GDP as a cumulative total for the year, and many residents report only at the end of the
year. The least GDP is produced in month 2, possibly because February is three days shorter than the other months.
Since the analyzed period is fairly short (due to absence of official statistical data), the calculated seasonality is highly
approximate. To obtain more accurate seasonal values, we need a time series longer than four years.
The detected seasonality of the real GDP leads to a good annual forecast of GDP. Having determined the trend for
the next year (this can be accomplished by smoothing the seasonally adjusted real GDP series with asymmetric filters or the
Holt-Winter method), we multiply it by the seasonal component to obtain a one-year forecast of real GDP.
Other time series can be analyzed and extrapolated in the same way. As we have noted previously, this analysis is
quite frequently used for various economic indicators because of its simplicity, small data requirements, and transparency of
assumptions.
Easily accessible statistical software (Eviews, Statistica) simplifies the application of the methods considered above
for analysis and extrapolation of various time series.

REFERENCES

. R. Pindyck and D. Rubinfeld, Econometric Models and Economic Forecasts, McGraw-Hill, New York (1981).
2. B. Bowerman and R. O'Connell, Forecasting and Time Series, North Scituare, Mass. (1979).
3. I. E. Teslyuk (ed.), Statistics: National Accounts, Indicators, and Methods of Analysis [in Russian], BGEU, Minsk
(1995).
. J. Johnston, Econometric Methods [Russian translation], Statistika, Moscow (1980).
5. Statistical Bulletins [in Russian], MinStat Ukr., Kiev, Nos. 1-12 (1994-1997).

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