Various statistics that governments produce on a regular basis carry the label “seasonally adjusted”. What is the meaning of this label? According to popular thinking the data that is observed over time (labelled as time series) is determined by four factors, which are:
The trend factor The cyclical factor The seasonal factor The irregular factor It is accepted that the trend determines the general direction of the data over time, while the cyclical factor causes movements that are related to the business cycle. The influence of seasons like winter, spring, summer and autumn and various holidays is conveyed by the seasonal factor. The irregular factor depicts the effect of various irregular events. It is held that the interplay of these four factors generates the final data.
Popular thinking regards the cyclical influence as the most important part of the data. It is held that the isolation of this influence would enable the analysts to unravel the mystery of the business cycle. Moreover, to pre-empt the negative effect of the business cycle on people’s well being it is important to observe the influence of the cyclical factor on as short a duration basis as possible. Like any disease the earlier it is detected the better are the chances of combating the disease. Once the central bank has identified the size of the cyclical influence it could offset this influence by means of a suitable monetary policy, so it is held.
This post was published at Ludwig von Mises Institute on August 16, 2017.