Making sense of a living in a “seasonally adjusted” world
Without a doubt many people have heard news reports over the past few years where some economic analyst proclaims that the economy has finally taken a turn for the better and people’s lives are improving. After hearing the opinion of this talking head, many may be left thinking one of two things. Is the person who is offering this opinion so totally out of touch with reality that they haven’t got the slightest clue how people are continuing to suffer in our lethargic economy? Or, alternatively, some may ask themselves — particularly if these good-news reports seem to continue week after week — if their lot in life is so lacking and their efforts so undervalued in the marketplace that they are falling behind while everyone else is finally recovering?
Just last week, for example, the Department of Labor reported that during November, the seasonally adjusted consumer price index was unchanged from the prior month; suggesting the Federal Reserve has more leeway in keeping monetary policy loose due to the (seeming) lack of inflationary pressures. But how can that be, many of us might wonder, since higher prices seem to be choking the financial life out of us and keeping our budgets under constant pressure? Can our impressions regarding constantly higher prices be totally out-of-touch with reality?
In short, if you feel as though you are in a losing battle with higher prices of many products, you are absolutely correct. According to the CPI report, price levels for a number of major spending categories in our monthly budgets are increasing significantly compared to the same time last year. For example, the cost of food in November 2011 compared to November 2010 was up a budget-busting 4.6 percent. And since food takes up a sizeable portion of many family budgets, this hardly qualifies as good news. Worse still, the cost of gasoline (all grades) jumped an even larger 19.7 percent compared to a year earlier.
Of course, our nation’s central bank, the Federal Reserve, tells us that food and energy prices fluctuate wildly from month-to-month and so they pay no attention to such price level changes when making monetary policy decisions. Wouldn’t it be wonderful if our budgets could also be so dismissive of such “inconsequential” spending categories? But, even assuming the Fed is reasonable in their opinion regarding food and energy prices, “core” inflation is now above the Fed’s assumed target range for inflation of 2 percent or less. In November, the year-over-year core inflation rate was 2.2 percent.
So, all of this must mean that economists and policy makers are a bunch of disconnected clods who are unaware of the suffering in peoples’ lives, right? Actually, no that is not necessarily true. The seeming contradiction involves an interpretational nicety that government statisticians use to make understanding economic information easier. It involves a process called “seasonal adjustment.”
As we are all no doubt aware, some types of economic activity go through seasonal boom-and-bust periods during the course of every year. Retail sales, for example, start the first couple of months at very low levels for many retailers, build throughout much of the year, and then explode during the final two months due to Christmas purchases. And this same basic pattern happens every year; making interpretation of year-over-year changes throughout the year quite difficult.
To accommodate such in-year fluctuations, the government removes the effects of these seasonal influences through the seasonal adjustment process to better understand the underlying trends the economy seems to be experiencing. That way, businesses and policymakers can better interpret how the economy seems to be proceeding, and can make better planning decisions. To be sure, all of this can take decision makers down the wrong path if the seasonal adjustment process is not accurate — which I happen to believe is occurring at this time with some consumer spending — but over the longer-term, it seems to produce reasonably good results.
Sadly one of the by-products of this process is that it may produce a gigantic disconnect between what economists and policy makers say about the strength of the economy and what each of us experiences in our day-to-day lives. Such a disconnect often happens at “turning points” in the economy. So, let’s hope this is one of those times; that the economy is shifting from bad-to-good (or perhaps bad-to-less bad), and our lives may materially improve in the near future, as some seasonally adjusted data suggests.
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.