Residual seasonality in GDP needs to be taken into account when assessing the health of the economy, says Cleveland Fed economist
Adjusting for this residual seasonality indicates that GDP growth, while remaining low, slowed from Q1:2016 to Q2:2016, rather than rose
Measuring economic growth is complicated by seasonality, the regular ﬂuctuation in economic activity that depends on the season of the year. The Bureau of Economic Analysis uses statistical techniques to remove seasonality from its estimates of GDP, and, in 2015, it took steps to improve the seasonal adjustment of GDP data. However, residual seasonality in GDP growth remains even after these adjustments, according to Federal Reserve Bank of Cleveland research economist Kurt Lunsford, who says this is largely due to the fact that the residual seasonality is present back to the 1990s, and the BEA’s annual revision adjusts back to only 2012.
Using new statistical techniques that Lunsford says offer some advantages over those used in prior work on the subject, the researcher finds that on average, ﬁrst-quarter GDP growth from 1985 to 2015 has residual seasonality of –0.8 percent on an annualized basis. He also finds that during the same time period, second-quarter GDP growth has residual seasonality of annualized 0.6 percent on average.
According to Lunsford, the size of this residual seasonality is economically meaningful and has the ability to change the interpretation of recent economic activity. “In the ﬁrst and second quarters of 2016, the BEA estimates of GDP growth are 0.8 percent and 1.4 percent, respectively, which indicates slow but rising growth in the ﬁrst half of 2016,” says the researcher. “However, after adjusting these numbers for the residual seasonality in GDP growth, they are 1.6 percent in the ﬁrst quarter and 0.8 percent in the second quarter. The adjusted data still indicate a low level of growth; however, they now indicate that growth slowed in the ﬁrst half of 2016, rather than rose, as indicated by data that do not undergo this second round of adjustment.”
Lunsford says this slowing in ﬁrst-half growth is more consistent with other economic variables. For example, an alternative measure of GDP, called gross domestic income, had estimated growth of 0.8 percent and –0.2 percent in the ﬁrst and second quarters of 2016, respectively. In addition, employment increased by 587,000 in the ﬁrst quarter of 2016 but only by 439,000 in the second quarter.
The researcher says the residual seasonality is driven by residual seasonality in two components of GDP: private investment and government consumption and investment. “When looking at the subcomponents of government consumption and investment, national defense drives nearly all of the residual seasonality. When looking at the subcomponents of private investment, it is not clear what is driving the residual seasonality,” says Lunsford.
Regarding the implications of his research for incoming 2017 data, Lunsford says, “As of March 24, the Atlanta Fed’s GDPNow model is predicting real GDP growth of 1.0 percent in Q1:2017 and government consumption and investment growth of -0.3 percent. The results of my study suggest that residual seasonality in GDP measurement is partly responsible for these low numbers.”
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
Doug Campbell, email@example.com, 513.455.4479