Seasonal Adjustment

Seasonal adjustment of time series is mainly the

isolation of seasonal fluctuations. It consists of the
identification, estimation and removal of seasonal
variations and effect of trading days and moving
holidays (if present) from a time series.

Why is seasonal adjustment done?

Seasonal adjustment is done to simplify data so that
they may be more easily interpreted by statistically
unsophisticated users without a significant loss of
information. (Bell and Hellmer, 1992)

Seasonal adjustment is mainly carried out for policy

makers or advisers who wish to be able, at a glance,
to read the trend of an economic time series without
being hampered by seasonal movements.

In the study of business cycles, seasonal adjustment is

essential when we want to estimate the trend-cycle
component.

After removal of seasonal variations, the resulting

series is referred to as seasonally adjusted series or
deseasonalized series.

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Example of Actual and Its Seasonally Adjusted Series

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Tests for Seasonality

Seasonality can be detected graphically, using multiple
line charts. However, in cases where presence of
seasonality is not clearly seen through visual
inspection, there are two commonly used statistical
tests for detecting presence of seasonality: the
Kruskal-Wallis test and the F-test based on the
analysis of variance using a linear regression model.

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Decomposition of Time Series

An observed time series, yt, can be decomposed into four
components namely: trend (ytt), cycle (ytc), seasonality (yts), and
irregularity (yti). For short series, it is difficult to disaggregate
the cycle from the trend and the two components are combined
into the trend-cycle (yttc) component. Two decomposition
models are commonly used in relating the observed value with
its four components.
a. Additive Model:
b. Multiplicative Model:

yt = yttc + yts + yti

yt = yttc x yts x yti

Two other available decompositions are the log additive and the
pseudo-additive decompositions, with the latter defined as,
yt = yttc x (yts + yti 1)
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Example of Quarterly Data Showing Seasonality

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Multiplicative vs. Additive Decomposition

When the parameters describing the time series are not

changing over time, the time series can be modeled
adequately by the additive decomposition method. An
example is the unemployment rate.

When the time series exhibits increasing seasonal variation,

then the appropriate model is the multiplicative model. An
example is the number of tourist arrivals.

The bulk of economic time series handled by the U.S. Bureau

of Census and the U.S. Bureau of Labor Statistics are adjusted
using multiplicative decomposition. The Federal Reserve uses
the additive version more frequently because of the nature of
the time series it treats.

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Example of Monthly Data Showing Seasonality

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Decomposition of Time Series

Decomposition of Time Series

Since the values of the components of the observed series are

not known, these are estimated.

A series of less than 30 years of data is usually considered

short when the purpose is to estimate the cycle.

To do seasonal adjustment, it is suggested that 5 to 15 years of

data points be used. This is to ensure that sufficient data is
available to estimate the seasonal component.

A more complete decomposition includes trading day

variations (yttd) and Easter or moving holiday effects (ytE) and
with yti partitioned into well-behaved noise (yti) and extreme
values (et).

The more complete models are,

for additive decomposition, and

for multiplicative decomposition.

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Decomposition of Time Series

The seasonally adjusted series for the additive model is,

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Trend-Cycle Component or Seasonally Adjusted

For series which exhibits much irregularity, and

consequently with et dominating it, an alternative
series to ytadj is the trend-cycle component, yttc.

The trend-cycle component, yttc, will show the trends

without being hampered not just by seasonality but
also by the high irregularity.

For short term indicators, most analysts prefer the

trend-cycle estimates than seasonally adjusted
estimates.

For the multiplicative model, the seasonally adjusted series is,

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Decomposition of Time Series

In the multiplicative decomposition model, only the trend is

measured in the same units as the original series.

Numerical Example of the Different

Components
Trend-Cycle (yttc)

Seasonal (yts )

2004M01

2849.0000

3148.3526

0.9316

0.9714

2004M02

3005.0000

3184.4134

0.9423

1.0015

2004M03

3362.0000

3221.7768

1.0287

1.0144

2004M04

2982.0000

3256.2975

0.9252

0.9898

A seasonal index of 100% indicates that seasonality is not

present, and any other value other than 100% suggest that
seasonality is present.

2004M05

3268.0000

3281.8767

0.9798

1.0163

2004M06

3318.0000

3307.4156

1.0048

0.9984

2004M07

3109.0000

3338.1344

0.9994

0.9320

2004M08

3430.0000

3373.3457

1.0128

1.0039

In the multiplicative decomposition, the seasonal index

represents the proportion that measures how far the observed
is from the base value.

2004M09

3641.0000

3413.6665

1.0785

0.9889

2004M10

3753.0000

3451.5004

1.0794

1.0073

2004M11

3685.0000

3482.1445

1.0284

1.0290

2004M12

3277.0000

3508.1526

0.9882

0.9452

The other three components are unit less and are referred to
as indexes. It is common practice to report these indexes in
percentage.

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Month

EXPORT (yt)

Irregular (yti)

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Some Common Procedures for

Seasonal Adjustment

Decomposition Process
X11 and X12

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The majority of seasonal adjustment procedures being used

are based on univariate techniques and estimation of the
components of a time series is done in a simple automatic
manner.
Two broad classifications of seasonal adjustment methods
are:
a) those based on regression and linear estimation
theory; and
b) those based on the application of linear smoothing
filters or moving averages.
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Main Steps in X11 ARIMA (Version 2000)

Seasonal Adjustment Procedures

Most statistical agencies use methods based on

moving averages for seasonal adjustment.

The two most commonly used are the U.S. Bureau

of Census X11-Method II Variant and Statistics
Canadas X11 ARIMA.

These two methods follow an iterative estimation

procedure involving the major steps in the
decomposition of a time series.

X11 ARIMA uses the Census X11 procedure on augmented data the time series plus one year of monthly or quarterly forecasts and
one year of backcasts from an ARIMA model. The X11 ARIMA
basically consists of:
a)

modeling the original series using an ARIMA or Box-Jenkins Model;

b)

forecasting one year of unadjusted data at each end of the series from
ARIMA models that fit and project the original series well; and

c)

seasonally adjusting the augmented series using X11-Method II

variant.

The Easter and trading-day adjustments are applied even before a)

is done if one asks for it.

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TRAMO

TRAMO-SEATS

A program for estimation and forecasting regression

models with possibly non-stationary (ARIMA) errors
and any sequence of missing values.

The program interpolates these values, identifies and

corrects for several types of outliers, and estimates
special effects such as Trading Day and Easter and
intervention variable type of effects.

Fully automatic model identification and outlier

correction procedures are available.

The program can pre-test for the level v. log

specification.

TRAMO - Time Series Regression with ARIMA Noise,

Missing Observations, and Outliers
SEATS - Signal Extraction in ARIMA Time Series

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SEATS

A program for estimation of unobserved components in

time series following the Auto-Regressive Integrated
Moving Average model based method.

The Trend, Seasonal, Irregular, and cyclical

components are estimated and forecasted with signal
extraction techniques (Kalman Filter) applied to
ARIMA models.

In Seasonal Adjustment, TRAMO pre-adjusts the series

to be adjusted by SEATS.

TRAMO-SEATS Program is due to Victor Gomez and

Agustin Maravall

TRAMO
Given the time series y1, y2, ,yn, the program fits
the regression model,

where is a vector of regression coefficient and

xt= (x1t, x2t, ,xnt) denotes n regression variables,
and t follows the general ARIMA model.

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TRAMO

The regression variable can be input by the user

(example: economic variables thought to be related to
yt), or generated by the program.

The variables that can be generated are trading days,

Easter effect and intervention variables such as:
a. dummy variables (additive outliers)

TRAMO PROGRAM

estimates using exact maximum likelihood the

parameters of the models (Regression and ARIMA)

detects and corrects for several types of outliers

computes optimal forecasts for the series, together

with their MSE

yields optimal interpolators of missing observations

and their associated MSEs

contains an option for automatic model

identification and automatic outlier treatment

b. any possible sequence of zeros and ones

c. 1/(1-B)(1-Bs) of any sequence of zero and ones.

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TRAMO

Although TRAMO can be used as a forecasting

program by itself, it can also be seen as a program
that polishes a contaminated ARIMA series.

It interpolates the missing observations, identifies

outliers and removes their effects, estimates Trading
Day and Easter Effect and produces a linear purely
stochastic process.

TRAMO is used as a pre-adjustment process to

SEATS, which decomposes the linearized series
and its forecasts into a stochastic components.

SEATS

The program then decomposes a series that follows model

(1) into several components, namely: Trend Component
(zpt), Seasonal Component (zst), Cyclical Component (zct),
Irregular Component (zit)

The decomposition assumes orthogonal components, and

each one will have an ARIMA expression. In order to
identify the components, it is required that (except for the
irregular component) the others be clean of noise.

This is called the canonical property, or that no additive

white noise can be extracted from a component that is not
the irregular one.

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X12 and TRAMO/SEATS

TRAMO/SEATS in EVIEWS

EVIEWS provides a convenient front-end to the

TRAMO/SEATS program as a series procedure.

By clicking Proc/Seasonal Adjustment/TRAMO

SEATS and filling out the dialog box, EVIEWS
writes an input file which is passed to
TRAMO/SEATS and reads the output files from
TRAMO/SEATS back into EVIEWS

EVIEWS provides only an interface to an external

program (TRAMO/SEATS).

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X12

and TRAMO/SEATS are seasonal adjustment

procedures based on extracting components from a given
series.

X12

uses a non-parametric moving average based method

to extract its components. TRAMO/SEATS bases its
decomposition on an estimated parametric ARIMA model.

The

main difference between the two methods is that X12

does not allow for missing values while TRAMO/SEATS
will interpolate the missing values based on an estimated
ARIMA model.
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Hodrick-Prescott Filter - Permanent Component

This

is a smoothing method that is widely used among

macroeconomists to obtain a smooth estimate of the longterm trend component of a series. The method was first
used in a working paper (circulated in the early 1980's and
published in 1997) by Hodrick and Prescott to analyze
postwar U.S. business cycles.

Hodrick-Prescott Filter - Permanent Component

That is, the HP filter chooses TRt to minimize:

is the penalty parameter that controls for the

smoothness of the series. The default values for are:

The

Hodrick-Prescott (HP) filter computes the permanent

component (TRt) of a series yt by minimizing the variance
of yt around TRt, subject to a penalty that constrains the
second difference of TRt.
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Hodrick-Prescott Filter - Permanent Component

parameter controls for the smoothness of the
series, by controlling the ratio of the variance of the
cyclical component and the variance of the series.

The

larger the , the smoother the TRt approaches

the linear trend.

The

and Rabelo (1993) showed that the HP filter

can render stationary any integrated process of up to
the fourth order.

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Hodrick-Prescott Filter - Permanent Component

The HP has some disadvantages. Harvey and Jaeger (1993)

showed that the use of HP filter can lead to identification of
spurious cyclical behavior.

Moreover, users of HP filter should not be interested in data

points near the beginning or the end of the sample. Baxter and
King (1995) recommended that three years of data be dropped
at both ends of the time series when the HP filter is applied
for quarterly or annual data.

Other extraction procedures: Baxter and King; Christiano and

Fitzgerald;

King

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