Heritage on Seasonal Adjustment


 

Is February employment growth overstated due to statistical problems?

From “February Employment Report: Has the Economy Seen Its Shadow?,” by James Sherk and Salim Furth, a discounting of the recent positive employment figures:

Another concern is the pattern of “spring boom, summer swoon” in BLS reports since 2010. In each of the past four years, the BLS employment report has shown strong growth in the late winter and early spring, followed by anemic growth in the summer. The winter and spring reports have led to hope for summer growth that then fizzles.

This pattern may be a result of the economic collapse of late 2008 and early 2009 interfering with the BLS seasonal adjustment process. The BLS’s algorithms may “expect” large job losses in the winter and spring that do not materialize, making their seasonally adjusted job reports appear artificially strong.[1] This month’s good numbers could represent a similar statistical mirage, similar to the growth in early 2010 that led the Administration to predict the “recovery summer”[2] that never arrived.[3]

On this topic, the Economic Report of the President, 2013 reports in “Data Watch 2-1: Seasonal Adjustment in Light of the Great Recession” (pages 47-48):

…detailed studies of a wide range of principal economic indicators suggest that the seasonal adjustment techniques that had already been employed by the Bureau of Labor Statistics (BLS) adequately accounted for the effects of the Great Recession. BLS analysts calculated alternative seasonal factors for total nonfarm payroll employment after manually excluding the sharp declines that were recorded during the downturn (Kropf and Hudson 2012). This counterfactual experiment failed to generate meaningful revisions to the actual published estimates of total nonfarm payroll employment since January 2010. In fact, the BLS analysts concluded that the implementation of these counterfactual seasonal factors would have revised total nonfarm payroll employment upward by a mere 24,000 jobs over the second and third quarters of 2011 (in other words, an average of 4,000 jobs a month) and downward by just 19,000 jobs over the fourth quarter of 2011 and the first quarter of 2012 (or an average of roughly 3,000 jobs a month). BLS analysts also thoroughly investigated the seasonal adjustment of the Current Population Survey data over the course of the recovery (Evans and Tiller 2012). This inquiry showed that alternative assumptions regarding seasonal adjustment did not meaningfully affect estimates of the unemployment rate since 2007.

While Sherk and Furth’s conjecture predates the release of the ERP, the referenced Kropf and Hudson article predates the Sherk and Furth issue brief by several months. The Kropf and Hudson (2012) article is excellent reading, and I am glad the Heritage Foundation’s random musings drew me to the paper (it saved me a lot of work trying to tease out the seasonals myself!). Chart 2 is particularly illuminating:

seas_adj_great_recession.gif
Source: Kropf, Jurgen, and Nicole Hudson. 2012. “Current Employment Statistics Seasonal Adjustment and the 2007–2009 Recession.” Monthly Labor Review 135, no. 10: 42–53.

The straightforward (and I believe correct) interpretation of the graph is that excluding the Great Recession from the sample period over which the seasonals are estimated does not have a large impact that is consistent with the Sherk and Furth conjecture.

None of the foregoing means that employment growth won’t decrease (I expect it very well might with the sequester going into effect [1]). However, if employment growth decreases, it won’t likely be attributable to a statistical artifact associated with the seasonal adjustment process.

Heritage on Seasonal Adjustment
Menzie Chinn
Thu, 21 Mar 2013 18:40:05 GMT

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