The Effect of Seasonal Adjustment on the Properties of Business Cycle Regimes

We study the impact of seasonal adjustment on the properties of business cycle expansion and recession regimes using analytical, simulation and empirical methods. Analytically, we show that the X-11 adjustment filter both reduces the magnitude of change at turning points and reduces the depth of recessions, with specific effects depending on the length of the recession. A simulation analysis using Markov switching models confirms these properties, with particularly undesirable effects in delaying the recognition of the end of a recession. However, seasonal adjustment can have desirable properties in clarifying the true regime when this is well underway. The empirical findings, based on four coincident US business cycle indicators, reinforce the analytical and simulation results by showing that seasonal adjustment leads to the identification of longer and shallower recessions than obtained using unadjusted data.