International Journal of Forecasting 20 (2004) 557 – 560

www.elsevier.com/locate/ijforecast

Implementation issues on shrinkage estimators for seasonal factors

within the X-11 seasonal adjustment method
Dominique Ladiray a,1, Benoit Quenneville b,*
a
INSEE, 18 Boulevard Adolphe Pinard, 75014 Paris, France
b
Business Survey Methods Division, Statistics Canada, 120 Parkdale Avenue, 17J-RHC-BSMD, Ottawa, ON, Canada K1A 0T6

Abstract

This commentary on Miller and Williams [Intl. J. Forecast. 20 (2004) 529 – 49] discusses how shrinkage can be implemented
within X12-ARIMA. We discuss how the seasonal factors are estimated in X12-ARIMA, how shrinkage can be translated into a
moving average, if this is compatible with the philosophy behind the X12-ARIMA method, and suggest possible improvements.
D 2004 International Institute of Forecasters. Published by Elsevier B.V. All rights reserved.

Keywords: Shrinkage estimators; Seasonal factors; X-11 seasonal adjustment method

The paper by Miller and Williams (2004) provides
two important results when X12-ARIMA estimated
seasonal factors are shrunk toward either 0 or 1, which
are their theoretical mean under the assumption of no
seasonality.
 The first result is that shrinkage reduces the
estimation error of the seasonal factors.
 The second result is related to a three-step
forecasting method: (a) estimate the seasonal
factors with X12-ARIMA and seasonally adjust
the series, (b) forecast the seasonally adjusted
series using a simple method such as exponential
smoothing, and (c) re-apply the seasonal factors to
the forecasts. Under this scenario, the result is that
shrinkage reduces the forecasting error.
* Corresponding author. Tel.: +1-613-951-1605; fax: +1-613-
951-5711.
E-mail address: benoit.quenneville@statcan.ca
(B. Quenneville).
1
This work was done while Dominique Ladiray was visiting
Statistics Canada.
The main conclusion is therefore that you can only
win (or gain) when X12-ARIMA estimated seasonal
factors are shrunk.
Consider the second result. The basic idea is to
decompose the series in parts which will be easier to
forecast, in order to improve forecasts. For this pur-
pose, a seasonal adjustment algorithm is used. This
algorithm is just a tool used to get a plausible decom-
position. The tool itself is not that much important: any
acceptable decomposition, even a very basic one such
as the classical decomposition, should improve your
forecasts (see, for example, Miller and Williams,
2003). In this paper, X12-ARIMA is used because it
is a widely used tool which also has a lot of nice
features for forecasters such as automatic detection and
correction for outliers and calendar effects. The
authors propose a correction, shrinkage of the seasonal
factors, to improve the forecasts: basically, forecasting
the seasonal component obtained by shrinking is
easier. But the purpose of this correction is in fact
forecasting, not seasonal adjustment. It is clear that
some series should not be seasonally adjusted with

0169-2070/$ - see front matter D 2004 International Institute of Forecasters. Published by Elsevier B.V. All rights reserved.
doi:10.1016/j.ijforecast.2004.03.003
558 D. Ladiray, B. Quenneville / International Journal of Forecasting 20 (2004) 557–560
X12-ARIMA but, for forecasting purposes, it does not
matter: shrinkage of the X12-ARIMA seasonal factors
reduces the forecasting errors over using them alone.
We are most concerned with the first result because
it points to a possible improvement for the estimation
of the seasonal factors by X12-ARIMA: this is a very
serious point for seasonal adjustment.
One advantage of the proposed shrinkage methods is
that they can be applied outside X12-ARIMA; conse-
quently, X12-ARIMA does not need to be modified,
and shrinkage can be applied at the users’ discretion.
In what follows, we will discuss how shrinkage can
be implemented within X12-ARIMA. We will discuss
how the seasonal factors are estimated in X12-
ARIMA, how shrinkage can be translated into a
moving average, if this is compatible with the philos-
ophy behind the X12-ARIMA method, and suggest
possible improvements.
1. X12-ARIMA seasonal factor estimation
The estimation of the seasonal factors in X12-
ARIMA is done within an X11 statement that imple-
ments the X11 Variant of the Census Method II
Seasonal Adjustment Program (Shiskin et al., 1967).
Ladiray and Quenneville (2001) provide a full de-
scription of the X11 variant as it is implemented in
X12-ARIMA. For the purpose of our comment, we
only need to summarize the basic algorithm used to
estimate the seasonal factors.
Assume the monthly series can be decomposed
into trend-cycle (C), seasonal factors (S) and irregular
(I) with no extreme value. X112 implements a simple
algorithm to iteratively estimate the components by a
judicious choice of moving averages. First X11 esti-
mate a trend-cycle with a 2  12 moving average3.
This trend-cycle is then removed from the series to get
a seasonal-irregular component (SI-ratio). Seasonal
factors are estimated from these SI-ratios with a
3  3 moving average over each month (on January
2
We mean the X11 statement of X12-ARIMA.
3 4
A P  Q moving average is obtained by composing a simple
moving average of order P, whose coefficients are all equal to 1/P,
and a simple moving average of order Q, whose coefficients are all
equal to 1/Q. In concrete terms, this amounts to applying both
simple moving averages in succession.
values, February values and so on). Next follow a
normalization of the seasonal factors, using a 2  12
moving average, to assure that they add up to 0
(additive decomposition model) or 1 (multiplicative
decomposition model) over 12 months. These nor-
malized seasonal factors are used to obtain a season-
ally adjusted series, from which a second trend-cycle
component is extracted using a Henderson moving
average4 instead of the 2  12 moving average. This
updated trend-cycle component is removed from the
original series and a new seasonal-irregular compo-
nent is obtained. Finally, the seasonal factors are
obtained with a 3  5 moving average followed with
normalization using a 2  12 moving average.
The selection of the length of the Henderson
moving average is based on the so-called I/C-ratio,
which quantifies the contribution of the irregular
component on the series. A large I/C-ratio calls for
a longer Henderson moving average. The symmetric
Henderson moving average is complemented with a
set of Musgrave asymmetric averages to allow for
the estimation of the trend-cycle component at the
end points of the series. Quenneville, Ladiray, and
Lefrancßois (2003) show that Musgrave asymmetric
averages are obtained by forecasting a linear trend-
cycle shrinking the estimate of the slope toward
zero.
The 3  5 moving average can also be replaced by
a 3  1, a 3  3 or a 3  9. The choice is done using
an I/S-ratio that quantifies the contribution of the
irregular component in the seasonal-irregular. Once
again, a large I/S-ratio calls for a longer moving
average. These composite symmetric moving aver-
ages are complemented with asymmetric averages to
allow for the estimation of the most recent seasonal
factors. Only the asymmetric moving averages asso-
ciated with the 3  9 seem to have been derived from
Musgrave’s formula.
At this point, we want to stress the following:
1. The choice of the length of the moving averages is
based on the contribution of the irregular.
Henderson moving averages have been designed to extract a
smooth component from a non-seasonal time series, which is the
case at this stage of the algorithm. In particular, Henderson moving
averages preserve local quadratic trends, which is not the case with
a 2  12 moving average.
 D. Ladiray, B. Quenneville / International Journal of Forecasting 20 (2004) 557–560
2. The filter lengths of the seasonal and trend filters
are chosen in a data-dependent fashion, but after
the lengths are determined, there is no further
dependence of the filter weights on the data.
3. The seasonal factors are estimated with moving
averages.
2. Shrinkage estimation for the seasonal factors
Now its time to ask the question if the proposed
shrinkage methods can be implemented within X11.
One of the features of the shrinkage methods is that it
is based on the contribution of the irregular in the
seasonal-irregular component, like the selection of the
seasonal moving average, but both the James-Stein or
Lemon-Krutchkoff shrinkage estimators will produce
an overall X11 filter that is data-dependent. This is in
contradiction with X11’s philosophy that tries to use a
small set of data-independent filters to estimate the
components in order to minimize revisions.
The proposed shrinkage methods are applied in a
moving fashion but this need to be revised. To apply
them in a truly moving manner consistent with X11,
the shrinkage weights must be calculated using the
past six and future six observations. For example, the
December seasonal factor would be computed from
the values of the previous 6 months, the current
December values and the values of the next six
Fig. 1. Gain functions of the central X11 moving average, with the 3  5 and a Henderson-type moving average.
559
months. This would prevent from possible distortions
due to the use of asymmetric filters. Obviously, the
use of moving averages raises the issue of what to do
at the end of the series with the most recent data
points, those of interest in current economic analysis.
Finally, official statisticians are very concerned with
data revisions; hence, the impact of shrinkage on
revisions of the seasonal factors after new data be-
come available has to be investigated.
3. Shrinkage as a new diagnostic
One important conclusion of the authors is that
X12-ARIMA seasonal factors remain virtually un-
damped for series with little random variation and great
seasonal variation, see Fig. 1, Series N2337 for an
example. We conjecture that this will often be the case
for a large class of ‘‘important’’ time series, especially
those that National Statistical Offices (NSO) take great
care in measuring with a lot of precision.
NSO also publishes time series with an important
irregular component. This is the case for series specific
to small industrial aggregate or small geographic areas.
The irregular component can sometime be so impor-
tant, that X12-ARIMA concludes that it cannot identify
seasonality. Fig. 1, series N1949 is a typical example of
such series. So, although X12-ARIMA produces sea-
sonal factors, a careful analysis of X12-ARIMA diag-
560 D. Ladiray, B. Quenneville / International Journal of Forecasting 20 (2004) 557–560
nostics may indicate that it should not be seasonally
adjusted. In this case, shrinkage can be used as a
safeguard by re-centering the seasonal factors. This
could lead to a new diagnostic method, but that needs to
be investigated further. For example, shrinkage reduces
the prediction mean square errors for non-seasonal
series over using X12-ARIMA seasonal factors alone,
but not as much as not using them at all, which is what
should have been observed. Additional tables of
Shrunk Seasonal Factors, and corresponding seasonal-
ly adjusted, trend-cycle and irregular series would best
fit in a new Part of X11, assuming the concerns raised in
the previous section can be satisfactorily solved.
4. Some propositions to improve X11 seasonal
factor estimation
The simulation experiment made by the authors
concludes that X12-ARIMA consistently overesti-
mates the seasonal variation. The program has several
options which could be used to correct this default in
some particular cases. For example, a longer compos-
ite moving average, or a different average for each
month can be used. Nevertheless, this is a serious
problem which deserves more attention and we be-
lieve that the seasonal factor estimation process could
be improved.
1. The procedure to select the composite simple
moving average from the I/S-ratio was set up in
X11-ARIMA/80 and modified in X11-ARIMA/88
(Dagum, 1988). Large-scale simulation studies
should be done to check the adequacy of this
procedure.
2. The rational for using a composite simple moving
average (3  1, a 3  3, a 3  5 or a 3  9) to smooth
the seasonal-irregular component has never been
clear and these moving averages do not have good
properties, except their simplicity. We suggest using
Henderson-type moving averages, only preserving
linear trends, in the estimation of the seasonal
component. The use of this kind of moving average5
has a surprising and very positive effect on the gain
5 7
The coefficients of the 3-, 5-, 7- and 11-term are all positive.
For example, the coefficients of the 7-term are {42, 112, 175, 200,
175, 112, 42}/858.
function of the central X11 moving average as
shown in Fig. 16. The two moving averages remove
seasonal frequencies but the filter with the Hender-
son-type moving averages preserves better the other
frequencies. Sutcliffe (1999) made a similar prop-
osition, using more complex moving averages.
3. Musgrave derived asymmetric moving averages for
both trend-cycle and seasonal factor curves; how-
ever, these moving averages were never imple-
mented in X11 for the seasonal factor estimation
except for the 3  9. The asymmetric averages used
for the 3  3, the 3  5 and the 3  7 are simplistic
and we advocate for the use of Musgrave-type’s
asymmetric averages7.
4. The 2  12 used to normalize the seasonal factors
performs some shrinkage of the seasonal factors.
This is most likely at this stage of the X11
algorithm that shrinkage of the seasonal factors
would be implemented.
References
Dagum, E. B. (1988). The X-11-ARIMA/88 Seasonal Adjustment
Method, Ottawa. ON: Statistics Canada Methodology Branch.
Ladiray, D., & Quenneville, B. (2001). Seasonal Adjustment with
the X-11 Method, Springer. New York: Springer-Verlag (Lecture
Notes in Statistics #158).
Miller, D. M., & Williams, D. (2003). Shrinkage estimators of time
series seasonal factors and their effect on forecasting accuracy.
International Journal of Forecasting, 19(4), 669 – 684.
Miller, D. M., & Williams, D. (2004). Damping seasonal factors:
Shrinkage estimators for the X12-ARIMA Program. Interna-
tional Journal of Forecasting, 20(4), 529 – 549 (this issue).
Quenneville, B., Ladiray, D., & Lefrancßois, B. (2003). A note on
Musgrave asymmetrical trend-cycle filters. International Jour-
nal of Forecasting, 19(4), 727 – 734.
Shiskin, J., Young, A. H., & Musgrave, J. C. (1967). The X-11
variant of the Census II method seasonal adjustment program.
Washington, DC: US Bureau of the Census (Technical Paper
No. 15).
Sutcliffe, A., (1999). Seasonal adjustment: Comparison of Philos-
ophies. Canberra, Australia: Working paper in Econometrics and
Applied Statistics No. 99-2, Australian Bureau of Statistics.
6
The gain function of an ideal seasonal adjustment moving
average is equal to one everywhere except at seasonal frequencies
(30j, 60j,. . ., 180j) where it is equal to zero.
The additional constraint that the resulting coefficients are all
positive has to be added. This is to prevent obtaining a negative
factor with a multiplicative decomposition model.