Seasonal adjustment removes recurring seasonal patterns from a time series to reveal underlying economic activity. Aggregated time series, such as gross domestic product (GDP), can be seasonally adjusted directly or indirectly with benefits and drawbacks to each approach. International guidance is that either approach can be used for GDP. The official measures of GDP and expenditure on GDP in New Zealand are directly seasonally adjusted.
The seasonal adjustment balancing item, commonly referred to as the residual, is the difference between GDP growth rates using direct and indirect seasonal adjustment. In recent years there has been an elevated level of seasonality in the residual, presenting challenges for the interpretation and forecasting of GDP statistics. This paper presents a side-by-side comparison of GDP growth rates using direct and indirect seasonal adjustment, explores causes of differences in the results produced by each approach and the emergence of seasonality in those differences, and highlights the challenges posed by a change in approach.
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Summary of key points
Unless otherwise specified, GDP refers to the headline production measure of GDP. The other measures are expenditure and income.
- National statistical offices like Stats NZ consider factors like time series behaviour, seasonal adjustment performance, and coherence of component and aggregate series when choosing which approach to use for GDP.
- Diagnostic testing over the whole GDP time series broadly supports the use of either direct or indirect seasonal adjustment. Indirect seasonal adjustment performs better in the absence of significant shocks, while direct seasonal adjustment can better capture the full impact of changes or shocks and allows for more straightforward intervention.
- Relatively large seasonal adjustment balancing items with a clear seasonal pattern are observed over the COVID-19-affected period and taper off before and after. The main causes are the shock to the time series and the use of additive outliers in the seasonal adjustment of GDP and component series.
- Other factors, like sharp changes in the prices used for chain linking, can also contribute to seasonality in the balancing item.
- Both direct and indirect seasonal adjustment are suitable for the production measure of GDP. Changing GDP from direct to indirect seasonal adjustment may improve the interpretation and forecasting of GDP, but it's a significant undertaking that would result in revisions to the entire GDP time series and would present coherence challenges between the different GDP measures.
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