The Washington Post confuses readers about seasonal adjustments

For an article that starts out in a really promising fashion:

If you assume each month's unemployment rate is a fixed number, think again.

it is truly disappointing that the rest of the article makes a mess of the statistics. So much so that it should come with a health warning: the Washington Post will make you confused about seasonal adjustments if you aren't already confused.

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The Labor Department makes adjustments to the raw unemployment statistics each week or month it presents the data. The 9% or 10% unemployment rate we hear about has been almost always a "seasonally-adjusted" number. Think of it as the "run rate" of unemployment, having controlled for seasonal patterns of unemployment. In the example suggested by the Washington Post article, unemployment decreases each summer when lifeguards are hired and increases after the summer when these jobs disappear. The "run rate" should reflect unusual changes in lifeguard employment but not the annual pattern of increase and decrease.

The adjustment is for unusual changes, which means the statisticians must first establish what the expected seasonal pattern should be. The expectation is derived from what happened in the recent past, and so each year, the adjustment factors will be revised because the "recent past" has shifted. 

The "news" in the Washington Post story concerns an update to the adjustment factors. There is no change to the adjustment method. Nor is the case that certain new patterns were discovered (as far as we know). The reporter makes a complete mess of this when she tells us:

Changes to the rates occur because the government aims to remove seasonal "noise" from the employment numbers. That "noise" can occur when, say, lifeguards are hired in June and let go in September.

The hiring and letting go of lifeguards is a well-known pattern that has been included in the existing seasonal adjustment. Unless the lifeguard employment picture is particularly unusual in the "recent past" in such a way that it isn't captured fully by the existing adjustment factor, the lifeguard scenario has nothing to do with the "news" coming out of the Labor Department.

The adjustment method itself dictates that there will be such a revision each year, and as the reporter points out, the changes are minor (less than 0.1% in any month) and only affect 3 or 4 months. This really isn't news.

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Buried deep in the article is a different type of adjustment worth paying attention to. The Labor Department makes two types of adjustments to the job creation number: seasonal adjustment, and correction of small-business bias. The latter is done through something called a birth-death model, and in normal economies, it is supposed to capture small-business jobs that were created that are missed in the surveys used to learn about job creation.

Not surprisingly, what is good practice in normal economies doesn't prove to be very practical in abnormal economies. In the recent past, the birth-death model has added hundreds of thousands of "phantom jobs" to the job creation statistic because the small-business jobs just weren't there. Once a year, the Labor Department looks back to see if indeed these small-business jobs exist. So, according to the Washington Post: 

The economy added a net total of 1.1 million jobs in 2010. That total will likely turn out to be lower - by 366,000.

In many lines of work, the magnitude of this error would cost jobs. John Crudele at the New York Post has done an admirable job over the years screaming about this issue. (Here's one of his more recent posts on the topic.)

Click here for my previous post on seasonal adjustments.

 

 

 

Comments

[Ken]

How is the unemployment data gathered in America ? Is it obtained from sampling businesses ? In Australia, we use a rolling sample of the households. This doesn't seem to need any correction of small-business bias, and should produce a good estimate other than the usual problems of non-response.

[Kaiser]

Ken: you can find more here. It's due to the delay in new businesses being included in the survey.