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
Agustn Maravall

Catherine Hood
2007 Catherine C.H.
Hood
Methods,
Diagnostics, and

Outline
Basic concepts
Software packages for seasonal
adjustment production

Mechanics of X-12 and SEATS

Overview of current practices

Recent developments in research areas
Catherine Hood
2007 Catherine C.H.
Hood
Methods,
Diagnostics, and

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
Catherine Hood
2007 Catherine C.H.
Hood
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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
Catherine Hood
2007 Catherine C.H.
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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 isnt

always better

Catherine Hood
2007 Catherine C.H.
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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

Catherine Hood
2007 Catherine C.H.
Hood
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Why Do Users Want

Seasonally Adjusted Data?

Seasonal movements can make

features difficult or impossible to see

Catherine Hood
2007 Catherine C.H.
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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

Catherine Hood
2007 Catherine C.H.
Hood
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Causes of Seasonal Effects

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

Catherine Hood
2007 Catherine C.H.
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10

Causes of Irregular Effects

Possible causes
Unseasonable weather/natural disasters
Strikes
Sampling error
Nonsampling error

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2007 Catherine C.H.
Hood
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11

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

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2007 Catherine C.H.
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12

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
Catherine Hood
2007 Catherine C.H.
Hood
Methods,
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13

June 2007
S

3 4 5 6 7
10 11 12 13 14
17 18 19 20 21
24 25 26 27 28
Catherine Hood
2007 Catherine C.H.
Hood
Methods,
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F S
1 2
8 9
15 16
22 23
29 30
14

Moving Holiday Effects

Holidays not at exactly the same time
each year
Easter
Labor Day
Thanksgiving

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2007 Catherine C.H.
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Methods,
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15

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

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2007 Catherine C.H.
Hood
Methods,
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16

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

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2007 Catherine C.H.
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22

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

take logarithms

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2007 Catherine C.H.
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23

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
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2007 Catherine C.H.
Hood
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26

Problem: Extreme Values

Solution:

These effects can be estimated also, but

they can be difficult to estimate when
seasonality and trend are present

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2007 Catherine C.H.
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27

 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

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2007 Catherine C.H.
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31

Models
Multiplicative model:
Yt = St Tt It

Additive model:
Yt = St + Tt + It

= St N t

= St + Nt

where

where
St = St + TDt + Ht

St = St TDt Ht

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2007 Catherine C.H.
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32

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

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2007 Catherine C.H.
Hood
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33

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)

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2007 Catherine C.H.
Hood
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34

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

( ) = X + Z

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
Catherine Hood Consulting

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 weve
found
AutoRegressive Integrated Moving Average
Models (ARIMA) are mathematical models
of the autocorrelation in a time series
One way to describe time series
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2007 Catherine C.H.
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37

Autocorrelation
The major statistical tool for ARIMA
models is the sample autocorrelation
coefficient
__

( Y Y ) ( Y
t

rk =

t-k

__

Y)

t=k+1

t=1

Catherine Hood
2007 Catherine C.H.
Hood
Methods,
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__

( Yt Y )2
38

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.

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2007 Catherine C.H.
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39

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

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2007 Catherine C.H.
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40

Autoregressive Processes
The autoregressive process of order p is
denoted AR(p),p and defined by
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
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2007 Catherine C.H.
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41

Moving Average Processes

The moving average process of order q,
denoted MA(q), includes lagged error terms
t1 to tq, written as
q

Zt = wt r wt-r
r=1

where 1 , 2 , , q are the MA parameters

and wt is white noise
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2007 Catherine C.H.
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42

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
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2007 Catherine C.H.
Hood
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43

ARMA processes
The autoregressive moving average
process, ARMA(p,q) is defined by
p

r=1

r=0

Zt r Ztr = r wtr
where again wt is white noise

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2007 Catherine C.H.
Hood
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44

Seasonal Processes
A seasonal AR process

Zt = r Zt-Sr + wt
p
A seasonal MA process

Zt = wt r wt-r
where 1 , . . . , P and 1 , , Q are fixed
constants, {wt} is white noise, and S is the
frequency of the series (12 for monthly or 4 for
quarterly)

Catherine Hood
2007 Catherine C.H.
Hood
Methods,
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45

RegARIMA Model
Yt
log
Dt

( ) = X + Z

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
Catherine Hood Consulting

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)
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2007 Catherine C.H.
Hood
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47

Automatic Procedures
Both X-12-ARIMA and SEATS have
procedures for the automatic
identification of
ARIMA model
Outliers
Trading Day effects
Easter effects

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2007 Catherine C.H.
Hood
Methods,
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48

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)

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2007 Catherine C.H.
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50

Example Trend Filter from

X-12-ARIMA
A centered 12-term moving average

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2007 Catherine C.H.
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51

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

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2007 Catherine C.H.
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52

Example Seasonal Filter from

X-12-ARIMA: 3x3 Filter

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

the detrended series
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2007 Catherine C.H.
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53

AMB Approach
Fit RegARIMA model yt = xt + Zt
Given an ARIMA model for series Zt,

(B) (B) Zt = (B) (B) wt

and the model Yt = St + Nt , determine
models for components St and Nt
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54

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)
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2007 Catherine C.H.
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55

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
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2007 Catherine C.H.
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56

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
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2007 Catherine C.H.
Hood
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57

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
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2007 Catherine C.H.
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58

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

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2007 Catherine C.H.
Hood
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59

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

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2007 Catherine C.H.
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60

Issues Relating to Current

Practices
X-12 versus SEATS
Use of RegARIMA models, for
forecasting, trading day, holidays, etc.
Diagnostics

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2007 Catherine C.H.
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61

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
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2007 Catherine C.H.
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62

X-12 vs SEATS
Eurostat recommends use of either program
US Census Bureau recommends use of X12-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

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2007 Catherine C.H.
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63

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
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2007 Catherine C.H.
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64

Trading Day and Moving

Holiday Settings
In Europe, there has been a lot of work on userdefined 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

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2007 Catherine C.H.
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65

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

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2007 Catherine C.H.
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66

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

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2007 Catherine C.H.
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67

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 )
Catherine Hood
2007 Catherine C.H.
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68

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

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2007 Catherine C.H.
Hood
Methods,
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69

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

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2007 Catherine C.H.
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70

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
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2007 Catherine C.H.
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71

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
Catherine Hood
2007 Catherine C.H.
Hood
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72

Model-based Adjustment
SEATS, developed by Agustn
Maravall at the Bank of Spain
REGCMPT, developed by Bill Bell at
the Census Bureau

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2007 Catherine C.H.
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73

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

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2007 Catherine C.H.
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74

REGCMPT
Advantages
Methods for different variability in
different months
Can build very flexible regARIMA
models

Still being tested

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2007 Catherine C.H.
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75

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

????

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2007 Catherine C.H.
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76

Running in Windows
TRAMO/SEATS for Windows
Windows Interface to X-12-ARIMA

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2007 Catherine C.H.
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77

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

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2007 Catherine C.H.
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78

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

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2007 Catherine C.H.
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79

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
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80

Contact Information
Catherine Hood
Catherine Hood Consulting
1090 Kennedy Creek Road
Auburntown, TN 37016-9614
Telephone: (615) 408-5021
Email: cath@catherinechhood.net
Web: www.catherinechhood.net
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2007 Catherine C.H.
Hood
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81