Seasonal Adjustments Roughly Account for Reported Drop in Unemployment Rate

In Friday’s post, I pointed out that unemployment and employment numbers announced by the BLS had apparently been changed greatly by the process of adjusting for typical seasonal changes. These adjustments are meant to account, for example, for the fact that retail business is generally stronger than usual during the holiday season at the end of each year. Friday’s widely reported unemployment drop to 9.0 percent in January from 9.4 percent the previous month was a figure that had been seasonally adjusted by the BLS to remove such normal seasonal effects. Also reported by the BLS Friday in the same set of documents were non-seasonally adjusted numbers that showed an increase in unemployment from 9.1 percent in December 2010 to 9.8 percent in January 2011. Few internet news outlets seem to have reported these latter percentages or the underlying raw numbers used to calculate them. On the other hand, many blogs and other news sources mentioned that adjustments had been made to the official numbers to reflect improved estimates of population growth from recent surveys, resulting in a problem with comparing January’s numbers with December’s. Friday morning’s blog post contained a qualifying statement to the effect that these population-related statistical adjustments had probably affected the un-seasonally adjusted numbers that I reported in the same post. Here is what I have been able to figure out about the importance of these two factors in creating such a large difference between the seasonally adjusted and non-seasonally adjusted one-month changes in the unemployment rates reported by the BLS.

The seasonally adjusted drop in number of unemployed people was -622,000, according to the BLS figures reported Friday. Table C in the accompanying news release estimated that annual changes in population estimates made by the BLS each January had this year magnified the reduction in unemployment from December to January by +32,000 individuals, leaving a true drop of perhaps −590,000, once one removed the effect of the population adjustments. On the other hand, non-seasonally adjusted figures from the same economic news release (Table A-1) showed an increase in the number of unemployed people of +40,000. Hence, one can deduce that, at least to a rough approximation, seasonal adjustment resulted in a much larger swing than population-related adjustments in figures reported in the headlines yesterday. Namely, about 630,000 more people were unemployed last month, once one puts back in the effects of typical seasonal changes in unemployment, as estimated by the BLS, resulting in a swing in the estimated figures of approximately +.4 percent of the labor force. In other words, the reported reduction in the unemployment rate from 9.4 percent to 9.0 percent in January derived from household survey data can be accounted for almost entirely by seasonal adjustments applied by the BLS.

Minor corrections for readability made to the post above approximately 2:00 pm, February 6 by G. Hannsgen