Seasonal Adjustments: Methodology vs. Reality

By Cuniff, John | THE JOURNAL RECORD, August 29, 1991 | Go to article overview

Seasonal Adjustments: Methodology vs. Reality


Cuniff, John, THE JOURNAL RECORD


If you were among millions who celebrated the rise in July durable goods orders, you probably expressed more faith in methodology than in reality.

In actuality, durable goods orders fell in July from their level of a month before, rather than rising 10.7 percent for what officials said was the sharpest increase in 21 years. A seasonal adjustment made the difference.

Millions still celebrated an increase. For those who believe the recession is over and the recovery has begun, this was the news they had been waiting for. They felt vindicated.

Economists declared the figures, as announced by the Commerce Department, gave evidence of a stronger than expected recovery. Stock brokers cheered. Reacting, the dollar strengthened. So did stocks.

In fact, the Dow Jones industrial average, most widely followed measure of the stock market, jumped 32.87 points to a record 3,040.25. For investors, the durable goods report was bigger news than foreign events.

But durable goods orders in July were lower than in June, according to the Sindlinger & Co. economic research firm. Actual orders in June amounted to $125.77 billion, compared with $114.216 billion in July. That is, in real terms, July's orders fell 9.8 percent rather than rising 10.7 percent.

The picture changed with the benefit of a seasonal adjustment, in which statisticians seek to adjust the actual numbers so as to eliminate the impact of strictly seasonal or recurring patterns.

No matter what is measured _ employment, durable goods, retail sales _ statisticians know that some months are likely to be stronger or weaker than others.

What analysts seek to determine is the underlying trend; they seek to wring out seasonality, and they devise formulas for doing so. Those formulas are based on what happened in that month for the preceding five years.

With seasonal adjusting, it is possible for a month-to-month decline to become an increase. It could happen, for example, if an actual decline was less than the seasonal pattern for the month. …

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