Before most economic indicators are released, they are calculated to reflect seasonal adjustments. What are seasonal adjustments? The simplest way to answer this question is with an example. It's no surprise that consumers do a lot more shopping during the November/December holiday period than at other times of the year. In addition, when the Christmas shopping season is over, retail sales often slow in January and February. These seasonal shifts in consumer spending patterns are quite common. They're temporary changes that have nothing to do with the business cycle.
Let's look at another example. In the spring when schools close, the number of people getting jobs surges as students enter the workforce to earn money over the summer. By mid-August, the process is reversed and employment drops off as students leave the workforce and return to school. Again, these fluctuations in employment are perfectly normal and are not indicative of a fundamental change in the economy's health. Even industrial production tends to fall in July as automakers shut down plants that month to retool their assembly lines for the new model year. No one should conclude this slowdown in industrial output means that the manufacturing sector is in trouble. These are all routine seasonal shifts that take place in the economy.
How do you differentiate changes that are the result of normal seasonal factors from those that represent a more serious problem in the economy? That's where the seasonal adjustment process comes in. Government experts look at economic data going back five to 10 years to identify recurring trends. These trends are changes in economic activity that have nothing to do with the broader business cycle but that can be explained by short-term external factors (such as summers, winters, and major holidays). After observing such patterns, officials come up with a formula that factors out variations in the economic numbers attributable to seasonal changes. This enables private economists and investors to discern economic events that should be viewed as normal from those that are out of the ordinary.
Seasonal adjustments, however, are far from perfect. You could have abnormal economic data even after seasonal adjustments are considered, and it still doesn't necessarily signal a turning point in the economy. Blizzards, floods, terrorism, labor strikes, and major bankruptcies are all unpredictable shocks that can have an impact on economic output, but their effects are almost always short-lived. Moreover, these incidents are easy to identify as the cause behind any sharp deviation in business activity. By and large, seasonal adjustments are important to analysts because they can help identify true deviations from the normal course of activity in the economy.
Now that we have reviewed some of the most widely-used terms that accompany economic indicators, we're ready to move on to the next chapters. What are the world's most influential economic indicators, and how do you get the most out of these statistics? How do you locate them? Interpret them? Most important of all, where can you find the clues that can tip you off on how the economy might perform in the future?