The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
U n em p lo ym en t Seasonals The economic data we use general ly are seasonally adjusted, thus al lowing us to make a direct compar ison of, say, a July figure with one from last February. Adjustment is especially important for series with large seasonal movements, such as the closely-watched unemploy ment rate—the total number of unemployed as a percentage of the civilian labor force. The series be came even more closely watched last week, when the Bureau of La bor Statistics reported that it had turned upward after a prolonged year-long decline. Actually, the seasonally adjusted unemployment series has moved through three distinct phases over the past year—a high plateau close to the recession peak of 8.9 percent from May through November of 1975, a steep drop last winter to 7.5 percent in March 1976, and finally an increase from 7.3 to 7.5 percent this June. Some observers have at tributed most of the puzzling movement in this series to difficul ties with seasonal factors—rightly so, it would seem, in regard to the accelerated decline reported early this year. (An alternate approach shows the drop taking place at a steadier pace and over a longer period, from November 1975 through May 1976, rather than the reported steep drop from Novem ber through March.) In contrast, the lengthy period of stability after the recession peak probably did occur just as reported. As for the June increase reported last week, it seems to reflect an essentially un solvable problem in setting the month's seasonals. 1 Unadjusted unemployment Seasonal movement in unemploy ment is dominated by three factors: the weather, Christmas, and the school schedule. The highest un employment rates occur in January and February; the lowest are in September and October. Thus, for the entire 1948-75 period, the over all jobless rate averaged 4.94 per cent, but the monthly rates on an unadjusted basis ranged between 5.69 percent (February) and 4.26 percent (October). This difference reflects basically the influence of the weather on outdoor activities, although the low numbers in the fall also indicate the return of tem porary labor-force members to school. Superimposed on this cycle are two very sharp seasonal swings. From December to January, the unadjust ed unemployment rate increases by an average of .88 percentage point, from 4.69 to 5.57 percent, as a result of post-Christmas layoffs of tem porary workers. From May to June, the rate increases by an average of .78 percentage point, from 4.59 to 5.37 percent, as a result of increased jobseeking at the end of the school year. (These are the average swings of the 1948-75 period, which of course are not repeated in every single year.) In both cases, the addi tion to the rate is absorbed over roughly a four-month span by a combination of added seasonal em ployment and decreased jobseek ing by temporary workers. The months which present difficult ad justment problems—primarily Jan uary, February and June—are the ( c o n t in u e d o n p a g e 2 ) Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. ones most strongly affected by large seasonal swings or by shifts in un derlying factors such as weather. Constructing seasonals To handle these problems, seasonal adjustments may be made in either of two ways—additive or multipli cative. In the additive approach, the unadjusted unemployment rate is adjusted each month by the differ ence between the average monthly figure and the average annual figure—in February's case, by add ing -.75 percent, or the difference between the 5.69-percent historical February average and the 4.94percent annual average for 1948-75. In the multiplicative approach, the unadjusted rate is adjusted each month by the ratio of the monthly seasonal and the monthly long term average—in February's case, by using a blow-up factor of -13.2 percent, or -.75 percent divided by 5.69 percent. The standard seasonal adjustment program—the Census X-11 program— is basically a complex multiplicative mechanism which al lows for continuously shifting sea sonals. Yet despite the sophistica tion of this and other approaches, seasonal adjustment remains more of an art than a science. Choices must be made among the various alternative approaches that are 2 available, and arbitrary decisions must be made regarding the stabili ty of actually observed seasonal movements—so that different stat isticians can reach strikingly differ ent conclusions about any single month's adjustment. The two basic approaches, additive and multiplicative, will yield similar results in those months which ex hibit little seasonal movement—or in those months where a series fluctuates around its mean, with little deviation from its trend line. Differences occur in the more ex treme cases, however. With an ad ditive adjustment, the amount of adjustment is assumed to be con stant; with a multiplicative adjust ment, the amount of adjustment is assumed to be proportional to the distance of the series from the mean. For example, multiplicative seasonals imply that in a recession, when unemployment is high, larger than normal swings occur in sea sonal unemployment—a somewhat questionable assumption. This ap proach says, quite reasonably, that unemployment will be abnormally high in a recession January or Feb ruary, but it also says that the ab sorption of that unemployment will be abnormally rapid in the follow ing March and April. While we might expect a limited amount of behavior of this type, the major share of any seasonality in the unemployment rate would normal ly be additive. Considerations of this kind thus should influence the selection of an adjustment method. As a rule of thumb, variables that grow over time (such as GNP) usually require seasonals that also grow—that is, multiplicative adjustment. But vari ables that do not grow (such as the unemployment rate) usually re quire additive seasonals because of the peculiar cyclical implications of multiplicative adjustment. Additive adjustments Some new light is thrown on the nation’s jobless data when we com pare an additive approach with the standard multiplicative approach (the Census X-11 program) that is utilized in the monthly series pub lished by the Bureau of Labor Statis tics. Actually, the two series have moved closely together through most of the 1974-76 period. Still, several differences have occurred which might help explain some of the puzzling movements in the data over the past year. In this exercise, three-month moving averages were used to smooth the series and thus limit the effect of statistical “ noise.” Most of the monthly figures were largely impervious to method of adjustment, showing once again that some months have far more reliable seasonal patterns than oth ers. But the February figure, when additively adjusted, was 0.4 percentage point higher than the 3 published figure in each of the last two years—8.5 percent in 1975 and 8.0 percent in 1976. The difference resulted from the tendency of mul tiplicative methods to produce very large (downward) adjustments to extreme months containing very high unemployment. The effect was highlighted in the moving average series, since the February moving average contains the two months (January and February) with the largest seasonals. The standard mul tiplicative adjustment thus pro duced a slower rise to the recession peak than the additive adjustment method, and compressed most of the recent decline in the rate within a relatively brief period. Another major anomaly was the change occurring in the May-toJune seasonal pattern over the past several decades. The swing in the unadjusted data from May to June rose from an average 0.4 percent in 1948-56 to 0.8 percent in 1957-63 and then to 1.2 percent in 1964-75. As a result, any adjustment method is forced to incorporate both the large size of the annual May-June swing and the (hard to measure) shift in that swing over time. We should thus take the unexpected June 1976 increase in published unemployment with a grain of salt until the more trustworthy July and August data arrive. Larry Butler uoj8u!qseyv\ • qEin • uoSaJO • EpcAafsj . oqepi MEMEH • EjUJOp|E3 • BUOZUy • E>|SB|V •J!|e3 'oaspuEJj ubs ZSL O N IIW M 3 d aivd aovisod *sn 1 IV W S S V 1 3 I S d ld BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Selected Assets and Liabilities Large Commercial Banks . Loans (gross, adjusted) and investments* Loans (gross, adjusted)—total Security loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other securities Deposits (less cash items)—total* Demand deposits (adjusted) U.S. Government deposits Time deposits—total* States and political subdivisions Savings deposits Other time deposits! Large negotiable CD's Weekly Averages of Daily Figures Member Bank Reserve Position Excess Reserves Borrowings Net free(+)/Net borrowed (-) Amount Change Change from Outstanding from year ago Dollar Percent 6/30/76 6/23/76 + 3,204 89,120 + 391 + 3.73 + 471 67,459 + 2,579 + 3.98 1,538 34 + 431 + 38.93 22,482 + 90 - 639 - 2.76 20,123 + 62 + 453 + 2.30 + 12.34 11,214 + 1,232 + 50 + 12.47 9,651 73 + 1,070 - 445 - 3.57 12,010 7 90,438 + 2,270 + 4,206 + 4.88 + 1,047 + 4.37 25,030 + 1,095 + 84 + 93.09 531 + 256 + 4.48 63,119 + 699 + 2,705 - 7.63 6,170 - 510 65 26,172 + 5,563 + 26.99 + 331 + 267 - 3.25 - 949 28,235 - 18.04 - 2,880 13,081 + 369 Week ended Week ended Comparable year-ago period 6/23/76 6/30/76 - 1 10 9 - 8 20 12 - 82 258 176 + 859 + 355 Federal Funds—Seven Large Banks Interbank Federal fund transactions + 370 - 548 Net purchases (+)/Net sales (-) Transactions of U.S. security dealers + 176 + 62 Net loans (+)/Net borrowings (-) “"Includes items not shown separately, individuals, partnerships and corporations. Editorial comments may be addressed to the editor (William Burke) or to the author . . . Information on this and other publications can be obtained by calling or writing the Public Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 544-2184.