Rathbun: ‘Tis the season (for adjusting)Written by Gary Rathbun | | GaryRathbun@PrivateWealthConsultants.com
One of the more frequent questions I get asked at the office is: What is seasonal adjusting? Many of the reports that we get out of Washington, D.C., have two sets of numbers, the actual numbers, or raw data, and the seasonally adjusted numbers.
Investopedia defines seasonal adjustment as: A rate adjustment used for economic or business data that attempts to remove the seasonal variations of the data. Most data will be affected by the time of year. Adjusting for the seasonality in data means more accurate relative comparisons can be drawn from month to month all year.
For the sake of this article let’s only look at just a couple of statistics that are adjusted. First, the Department of Labor releases the unemployment numbers each week. The DOL releases two numbers each week, the actual number of people applying for and continuing on unemployment and the seasonally adjusted number. Often times the numbers are vastly different.
On Aug. 11, the DOL said the number of initial claims for unemployment was 366,000 on a seasonally adjusted basis. The actual claims, unadjusted, totaled 315,776, about 50,000 fewer than the adjusted number. Last week seasonal adjusting made the numbers look worse; in other months it is just the opposite, seasonally adjusting the numbers makes them look better.
It is easy to fall into the conspiratorial thought process that the DOL is trying to make the numbers look good for the president when they adjust them down but they also adjust them up as you can see from last week. The thought process is that by evening out the numbers from month to month and year-to-year that it is easier to do a direct macro comparison.
Think of it this way: Many of you have seasonal adjusting in your own life and probably don’t even realize it. Those of you who have utility bills that are even throughout the year are essentially using seasonal adjusting. The utility company figures out your last several years’ expenditures on electricity or gas and then figure in the increase, if any, over the next 12 months and then gives you a monthly amount to pay. At the end of the year any discrepancy between what you actually paid and what you actually used is calculated and credited or debited for the next 12 monthly bills.
This “smoothed out” the costs from month to month so that any individual month does not bust your budget and makes your bills more predictable throughout the seasons.
Recently, we had another seasonal adjustment that does give rise to some manipulation other than smoothing out the numbers. July retail sales numbers came out recently and were looked upon as very positive. I read several pundits said that the U.S. consumer is back and that the second half of the year will improve. We are always reminded that the consumer is responsible for more than 70 percent of the total gross domestic product, so if the consumer is spending again, then we are on the road to recovery.
The trouble is that for the last 10 years the seasonal adjustment for retail sales in July is adjusted down an average of $5.2 billion; this year, the numbers were adjusted up $1.9 billion. The explanation is a little weak; July 4 was in the middle of the week this year, making a difference in the number of shopping weekends for the month. The same thing happened in June last year, and the adjustment did nothing to help the results.
While I am not going to attempt to try to understand all of the econometrics and the vain pursuit of economic precision, I will say that it creates a false sense of comfort to take some of these reports at face value. It will be interesting to see what August numbers are and how they are adjusted for back-to-school sales and vacations.
Everything can be seasonally adjusted and therefore everything can be manipulated to a certain extent for a period of time. Continue to do your homework and dig into the numbers, not just the headlines.
Gary L. Rathbun is the president and CEO of Private Wealth Consultants Ltd. He can be heard at 4:06 p.m. every day on “After the Bell with Brian Wilson and the Afternoon Drive” and at 6 p.m. Wednesdays and Thursdays throughout Northern Ohio on “Eye on Your Money.” He can be reached at (419) 842-0334 or e-mail him at email@example.com.