Methods, Diagnostics, and Practices For Seasonal Adjustment

Methods, Diagnostics, and
Practices for Seasonal

Adjustment
Catherine C. H. Hood
Introductory Overview Lecture: Seasonal Adjustment
Acknowledgements
 Many thanks to
● David Findley, Brian Monsell, Kathy
McDonald-Johnson, Roxanne Feldpausch
● Agustín Maravall
Catherine Hood Consulting

Methods, Diagnostics, and Practices for Seasonal Adjustment---June 2007 2
© 2007 Catherine C.H. Hood
Outline
 Basic concepts
 Software packages for seasonal
adjustment production
● Mechanics of X-12 and SEATS
 Overview of current practices
 Recent developments in research areas
Time Series
 A time series is a set of observations
ordered in time
● Usually most helpful if collected at regular
intervals
 In other words, a sequence of repeated
measurements of the same concept over
regular, consecutive time intervals

Time Series Data
 Occurs in many areas: economics, finance,
environment, medicine
 Methods for time series are older than those
for general stochastic processes and Markov
Chains
 The aims of time series analysis are to
describe and summarize time series data, fit
models, and make forecasts
Why are time series data
different from other data?
 Data are not independent
● Much of the statistical theory relies on the data
being independent and identically distributed
 Large samples sizes are good, but long time
series are not always the best
● Series often change with time, so bigger isn’t
always better

What Are Our Users Looking for
in an Economic Time Series?
 Important features of economic
indicator series include
● Direction
● Turning points
□ In addition, we want to see if the series is
increasing/decreasing more slowly than it
was before
● Consistency between indicators
Why Do Users Want
Seasonally Adjusted Data?
Seasonal movements can make

features difficult or impossible to see

Classical Decomposition
 One method of describing a time series
 Decompose the series into various components
● Trend – long term movements in the level of the series
● Seasonal effects – cyclical fluctuations reasonably
stable in terms of annual timing (including moving
holidays and working day effects)
● Cycles – cyclical fluctuations longer than a year
● Irregular – other random or short-term unpredictable
fluctuations

Causes of Seasonal Effects
 Possible causes are
● Natural factors
● Administrative or legal measures
● Social/cultural/religious traditions
(e.g., fixed holidays, timing of
vacations)

Causes of Irregular Effects
 Possible causes
● Unseasonable weather/natural disasters
● Strikes
● Sampling error
● Nonsampling error

Other Effects
 Trading Day: The number of working
or trading days in a period
 Moving Holidays: Events which occur
at regular intervals but not at exactly
the same time each year

May 2007
S M T W T F S
1 2 3 4 5
6 7 8 9 10 11 12
13 14 15 16 17 18 19
20 21 22 23 24 25 26
27 28 29 30 31
June 2007
S M T W T F S
1 2
3 4 5 6 7 8 9
10 11 12 13 14 15 16
17 18 19 20 21 22 23
24 25 26 27 28 29 30
Moving Holiday Effects
 Holidays not at exactly the same time
each year
● Easter
● Labor Day
● Thanksgiving

“Combined” Effects
 Trading day and moving holiday
effects are both persistent, predictable,
calendar-related effects, so trading day
and holiday effects often included with
the seasonal effects

The Simple Case
 The time series would have
● No growth or decline from year to year,
only rather repetitive within-year
movements about an unchanging level
● No trading day or moving holidays

Change in Variations
 What if the magnitude of seasonal
fluctuations is proportional to level of
series?
● take logarithms

Log Transformations
 Appropriate when the variability in a series
increases as its level increases, and when all
values of the series are positive
 Change multiplicative relationships into
additive relationships
 Increases/decreases can be thought of in
terms of percentages

Problem: Extreme Values
 Solution:
● These effects can be estimated also, but
they can be difficult to estimate when
seasonality and trend are present

 Which of these values are outliers (extreme
values)?
Trading Day and Other Effects
 What if trading day and/or other effects
(holiday, outliers) are present?
● X-11: TD, holiday regression on the irregular
component, extreme value modifications
● SEATS: RegARIMA models for a regression on
the original series
● X-12: Use X-11 methods or RegARIMA models

Models
Multiplicative model: Additive model:
Yt = St´ × Tt × It Yt = St´ + Tt + It
= St´ × Nt = St´ + Nt
where where
St´ = St × TDt × Ht St´ = St + TDt + Ht

Objectives
 Estimate Nt (remove effects of St ) for

seasonal adjustment
 Estimate Tt (remove effects of St and It)
for trend estimation

How Do We Estimate the
Components?
 Seasonal adjustment is normally done
with off-the-shelf programs such as:
● X-11 or X-12-ARIMA (Census Bureau),
● X-11-ARIMA (Statistics Canada),
● Decomp, SABL, STAMP,
● TRAMO/SEATS (Bank of Spain)

RegARIMA Models
(Forecasts, Backcasts, and Preadjustments)
Modeling and Model

Comparison Diagnostics
and Graphs
Seasonal Adjustment
Seasonal Adjustment
Diagnostics and Graphs
RegARIMA Model
Yt
log ( ) Dt
= ´ Xt + Zt
transformations ARIMA process
Xt = Regressor for trading day and holiday or

calendar effects, additive outliers, temporary
changes, level shifts, ramps, and
user-defined effects
Dt = Leap-year adjustment, or “subjective” prior
adjustment
ARIMA Models and Forecasting
 If we can describe the way the points in the
series are related to each other (the
autocorrelations), then we can describe the
series using the relationships that we’ve
found
 AutoRegressive Integrated Moving Average
Models (ARIMA) are mathematical models
of the autocorrelation in a time series
 One way to describe time series
Autocorrelation
 The major statistical tool for ARIMA
models is the sample autocorrelation
coefficient
n __ __
( Y – Y ) ( Y
t=k+1
t t-k –Y)
rk = n __

t=1
( Yt – Y )2
Autocorrelations
 r1 indicates how successive values of Y
relate to each other,
 r2 indicates how Y values two periods
apart relate to each other,
 and so on.

ACF
 Together, the autocorrelations at lags 1, 2,
3, etc. make up the autocorrelation function
or ACF and then we plot the
autocorrelations by the lags
 The ACF values reflect how strongly the
series is related to its past values over time

Autoregressive Processes
 The autoregressive process of order p is
denoted AR(p), and defined by
p
Zt =  r Zt-r + wt
r=1
where 1 , . . . , p are fixed constants and

{wt} white noise, a sequence of independent
(or uncorrelated) random variables with
mean 0 and variance  2
Moving Average Processes
 The moving average process of order q,
denoted MA(q), includes lagged error terms t–
1 to t–q, written as
q
Zt = wt –  r wt-r
r=1
where 1 , 2 , … , q are the MA parameters

and wt is white noise
Random Walk
 Constrained AR Model
Zt = Zt-1 + wt with 1 = 1
 First differenced model
Zt = Zt-1 + wt
Zt – Zt-1 = wt
(1 – B) Zt = wt
 Seasonal difference model
Zt – Zt-12 = wt
ARMA processes
 The autoregressive moving average
process, ARMA(p,q) is defined by
p q
Zt –  r Zt–r =  r wt–r
r=1 r=0
where again wt is white noise

Seasonal Processes
 A seasonal AR process
Zt =  r Zt-Sr + wt
 A seasonal MA process
p
Zt = wt –  Θr wt-r
where 1 , . . . , P and Θ1 , … , ΘQ are fixed
constants, {wt} is white noise, and S is the
frequency of the series (12 for monthly or 4 for
quarterly)

RegARIMA Model
Yt
log ( ) Dt
= ´ Xt + Zt
transformations ARIMA process
Xt = Regressor for trading day and holiday or

calendar effects, additive outliers, temporary
changes, level shifts, ramps, and
user-defined effects
Dt = Leap-year adjustment, or “subjective” prior
adjustment
RegARIMA Model Uses
 Extend the series with forecasts (or possibly
backcasts)
 Detect and adjust for outliers to improve the
forecasts and seasonal adjustments
 Estimate missing data
 Detect and directly estimate trading day
effects and other effects (e.g. moving holiday
effects, user-defined effects)
Automatic Procedures
 Both X-12-ARIMA and SEATS have
procedures for the automatic
identification of
● ARIMA model
● Outliers
● Trading Day effects
● Easter effects

RegARIMA Models
(Forecasts, Backcasts, and Preadjustments)
Modeling and Model

Comparison Diagnostics
and Graphs
Seasonal Adjustment
Seasonal Adjustment
Diagnostics and Graphs
How are component estimates
formed?
 X-11, X-12: limited set of fixed filters
 ARIMA Model-based (AMB):
● Fit ARIMA model to series
● This model, plus assumptions, determine
component models
● Signal extraction to produce component
estimates and mean squared errors (MSE)

Example Trend Filter from
X-12-ARIMA
 A centered 12-term moving average

Example: 3x3 Filters
3 x 3 filter for Qtr 1, 1990 (or Jan 1990)
1988.1 + 1989.1 + 1990.1 +

1989.1 + 1990.1 + 1991.1 +
1990.1 + 1991.1 + 1992.1
9

Example Seasonal Filter from
X-12-ARIMA: 3x3 Filter
 Recall that Y = TSI, so SI = Y/T, i.e.,

the detrended series

AMB Approach
 Fit RegARIMA model yt = x´t  + Zt
 Given an ARIMA model for series Zt,
 (B)  (B) Zt = Θ (B)  (B) wt
and the model Yt = St + Nt , determine
models for components St and Nt

Where . . .
 St independent of Tt independent of It
(  St independent of Nt )
 St , Tt , It follow ARIMA models
consistent with the model for Zt
(hence so does Nt)
 It is white noise (or low order MA)

Canonical Decomposition
 Problem: There is more than one
admissible decomposition
 Solution: Use the canonical
decomposition, the decomposition that
corresponds to minimizing the white
noise in the seasonal component

Properties of the Canonical
Decomposition
 Unique (and usually exists)
 Minimizes innovation variances of
seasonal and trend; maximizes
irregular variance
 Forecasts of St follow a fixed seasonal
pattern
Advantages of AMB Seasonal
Adjustment
 Flexible approach with a wide range of
models and parameter values
 Model selection can be guided by
accepted statistical principals
 Filters are tailored to individual series
through parameter estimation, and are
“optimal” given

Advantages of AMB Seasonal
Adjustment (2)
 Signal extraction calculations provide
error variances of component estimates
with MSE based on the model
● Approach easily extends (in principle) to
accommodate a sampling error
component

At the End of the Series
 X-11: asymmetric filters (from ad-hoc
modifications to symmetric filters)
 X-11-ARIMA, X-12: one year
(optionally longer) forecast extension
 AMB: full forecast extension

Issues Relating to Current
Practices
 X-12 versus SEATS
 Use of RegARIMA models, for
forecasting, trading day, holidays, etc.
 Diagnostics

Agreement in Current Practices
 Compute the concurrent factors (running
the seasonal adjustment software every
month with the most recent data) instead of
projected factors
 Use regARIMA models whenever possible
(ARIMA models required for SEATS)
 Continue to publish the original series along
with the seasonal adjustment
X-12 vs SEATS
 Eurostat recommends use of either program
 US Census Bureau recommends use of X-
12-ARIMA
● According to research, X-12 is more accurate
than SEATS for most series
● X-12 works better for short series (4 to 7 years)
and for longer series (over 15 years)
● X-12 has better diagnostics

Setting Options
 To reduce revisions, best to set certain
options for production
● Most agencies let the software choose the
options and then fix the settings for production
 Problems come with SEATS because model
used is not always the model specified, and
model coefficients also are not always the
ones specified

Trading Day and Moving
Holiday Settings
 In Europe, there has been a lot of work on “user-
defined” variables that include trading days and
moving holidays to incorporate country-specific
holidays
 Most agencies in the U.S. use built-in trading day
and built-in moving holidays from X-12-ARIMA
● Unfortunately, not all the built-in variables are useful
for every situation
● Some agencies avoid trading day altogether

Outlier Settings
 At the Australia Bureau of Statistics, they have a
very rigorous procedure of outlier identification,
including meta data on certain unusual events
 Most other agencies use the automatic outlier
selection procedure
 At the U.S. Census Bureau
● Choose new outliers with every run
● At annual review time, set outliers for current data and
set a high critical value for the new data coming in

Direct/Indirect Definitions
 If a time series is a sum (or other
composite) of component series
● Direct adjustment – a seasonal adjustment of
the aggregate series obtained by seasonally
adjusting the sum of the component series
● Indirect adjustment – a seasonal adjustment of
the aggregate series obtained from the sum of
the seasonally adjusted component series

Example – Direct and Indirect
Adjustment
US = NE + MW + SO + WE
 Indirect seasonal adjustment of US:

SA(NE) + SA(MW) + SA(SO) + SA(WE)
 Direct seasonal adjustment of US:
SA( NE + MW + SO + WE )

Comment on Yearly Totals
 When do yearly totals of the original series
and the seasonally adjusted series coincide?
 When the series has
● An additive decomposition
● A seasonal pattern that is fixed from one year to
the next
● No trading adjustments

Areas for Improvement in
Current Practices
 Concurrent adjustment
 Use of regARIMA models
● Moving holidays and other user-defined effects
 Setting options (to reduce revisions) and
checking the options regularly
 Software to make it easier to check
diagnostics regularly
● Training in ARIMA modeling and diagnostics
Recent Developments and
Research Areas
 X-13 (X-13-SEATS)
 Improved and new diagnostics (for both
X-12 and SEATS)
 New filters for X-12 and new, more
flexible models for SEATS
 Supplemental and utility software
 Documentation and training
Newest X-12
 Version 0.3 includes a new automatic
ARIMA-modeling procedure based on
the program TRAMO from the Bank of
Spain
 The next release (X-13) will include
ARIMA-model-based seasonal
adjustment options
Model-based Adjustment
 SEATS, developed by Agustín
Maravall at the Bank of Spain
 REGCMPT, developed by Bill Bell at
the Census Bureau

SEATS
 Disadvantages
● No diagnostics for the adjustment
● No methods for series with different
variability in different months
● No user-defined regressors
● Not very flexible ARIMA models

REGCMPT
 Advantages
● Methods for different variability in
different months
● Can build very flexible regARIMA
models
 Still being tested

X-13-SEATS
 Advantages
● Would combine the model-based
adjustments from SEATS with
diagnostics from X-12, and keep the
ability to use X-11-type adjustments also
 Disadvantage
● ????
Running in Windows
 TRAMO/SEATS for Windows
 Windows Interface to X-12-ARIMA

Supplemental Software
 X-12-Graph in SAS and in R
 X-12-Data and X-12-Rvw
 Programs to help write user-defined
variables for custom trading day and
moving holidays
 Excel interfaces to run SEATS and X-12
from Excel
● Interfaces to other software are available
Documentation and Training
 Documentation
● “Getting Started” papers to use with the
Windows version, written for novice users
● Documentation on commonly used options for
both X-12 and SEATS
 Training
● Advanced Diagnostics
● RegARIMA Modeling

Resources
 X-12-ARIMA website
www.census.gov/srd/www/x12a
 Seasonal adjustment papers pages
 TRAMO/SEATS website
www.bde.es/english/
 Papers and course information
www.catherinechhood.net

Contact Information
 Catherine Hood
1090 Kennedy Creek Road
Auburntown, TN 37016-9614
 Telephone: (615) 408-5021
 Email: cath@catherinechhood.net
 Web: www.catherinechhood.net

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Methods, Diagnostics, and

Practices for Seasonal

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Seasonal movements can make

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

 Estimate Nt (remove effects of St ) for

Catherine Hood Consulting

Catherine Hood Consulting

Modeling and Model

transformations ARIMA process

Xt = Regressor for trading day and holiday or

Catherine Hood Consulting

Catherine Hood Consulting

where 1 , . . . , p are fixed constants and

where 1 , 2 , … , q are the MA parameters

Catherine Hood Consulting

Catherine Hood Consulting

transformations ARIMA process

Xt = Regressor for trading day and holiday or

Catherine Hood Consulting

Modeling and Model

Catherine Hood Consulting

Catherine Hood Consulting

1988.1 + 1989.1 + 1990.1 +

Catherine Hood Consulting

 Recall that Y = TSI, so SI = Y/T, i.e.,

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

 Indirect seasonal adjustment of US:

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

Catherine Hood Consulting

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