Thursday, July 9, 2009

Perils of Seasonal Adjustments

565K new jobless claims, lowest level since Jan.” reads the AP headline. Some news outlets report a steep drop in jobless claims.

It sounds like good news, right? But wait a minute. Go to the source, the U.S. Department of Labor, and it says that the actual number of new jobless claims for the week was

577,506 in the week ending July 4, an increase of 17,612 from the previous week.

So what’s going on? How does a sizable increase turn into a steep drop?

It’s not that anyone is trying to deceive you. The discrepancies are the result of seasonal adjustments. Seasonal adjustment is a statistical technique that is supposed to smooth out the time of year in economics data so that you don’t get too alarmed by things that happen the same way year after year.

In normal times, seasonal adjustment is an excellent, if often problematic, device for removing some of the noise from economic data. But when you go through wrenching economic changes, changes so big that they change what the seasons mean, seasonal adjustments no longer work — they add as much noise as they take away.

That’s something we’ve been seeing all year long, and that’s what we’re seeing again in today’s jobs report. The Reuters story hints at the problem: many of the summer plant closings in the automobile industry took place several weeks earlier this year. A few of those factories are closed forever. In the automobile industry, seasons aren’t what they used to be, and that makes the seasonally adjusted data look better than it is this week.

It is only a phantom improvement in the jobs data. This point is hammered home by the report on continuing claims. The number of people receiving unemployment benefits in the United States is higher than it has ever been, and it jumped up 159,000 from the prior week. The job market is deteriorating at least as fast as is has been all year.

This week’s “good” news isn’t really good news, and some of the “bad” news is just as much an illusion. Some weeks we get data that makes it look like the economy is collapsing, and that isn’t really happening either. What we’re seeing, when you get past the noise, is a steady decline. A decline is never what you hope for, but the steady movement is reassuring in the sense that it merely reflects old economic patterns giving way to new ones. This is just a transition in the economy, a bigger transition than we have ever seen, perhaps, but still just a transition, and we will get through it.