MainStreet Macro: Seasons of Change

People love the changing seasons. Whether it’s a snowy winter or a summer day at the beach, a lot of folks have favorite times of year that they know they can look forward to.

The job market, too, is subject to seasonal adjustments. With all the change in the air right now, today we’ll examine the seasons of economic change.

How is economic data seasonal?

Employment data has regular patterns that occur in predictable ways every year. For example, U.S. employment tends to be higher in the winter and spring then over the summer. Data also can be affected by holidays. About 20 percent of retail sales each year occur during the weeks between Thanksgiving and Christmas.

Inflation metrics are seasonally adjusted to account for the fact that prices on certain goods and services tend to be higher at certain times of the year. I’m a big fan of blueberries, which always are much cheaper in season than out of season.

To determine the real health of the economy, economists try to look beyond seasonal patterns in the data. These seasonal adjustments help distinguish actual shifts in the economy from routine, episodic changes that occur every year.

How has the pandemic affected seasonality?

Seasonal adjustments are based on historical patterns. The dramatic swing in economic activity that began with the sharp pandemic downturn of early 2020 and continued with seismic growth in 2021 distorted those patterns and the seasonal order economists had come to expect.

The economy shrank by 30 percent in the second quarter of 2020, only to experience an even more dramatic rebound in the third quarter. More than 22 million jobs were wiped out between February and April 2020, crash that was followed by bursts of hiring (and a few setbacks) during the ensuing recovery. Inflation, too, went haywire, all but disappearing in the first months of the pandemic then surging to 7.5 percent in January. 

These extremes have made traditional seasonal adjustment much more challenging. Instead of running tried-and-true algorithms to peer through seasonal patterns, government statistical agencies now have to make judgement calls based on experience with recessions and other extraordinary events to determine the real health of the economy.  

What does this mean for labor indicators?

One seasonal pattern in jobs data is that the economy tends to shed jobs in January. This trend is driven by temporary holiday hiring in December, which tapers off at the start of the year. To account for this expected shift, jobs data are seasonally adjusted to remove the January distortion.

But the standard tools used to adjust for seasonality just aren’t powerful enough to adjust for data distortions caused by the pandemic.

Even after January’s routine seasonal adjustment, most economists expected job gains that month to be subdued given the spike of Omicron cases. Instead, January surprised to the upside, with job gains topping economic forecasts. Even better, November and December job gains turned out to be much bigger than originally reported. (It’s common for economic data to be revised in subsequent months as more information comes in.)

Capturing patterns that emerged during the pandemic won’t be easy. Ad hoc adjustments and substantial revisions — both up and down – will be more common.

The pandemic’s effect on labor market indicators will have a profound affect for years to come, which will make macro measurement a challenge.

My Take

Just like seasons, shifts in the economy don’t always line up to dates on the calendar.

If highly trained economists have a hard time adjusting for seasonal variation after the pandemic, how are employers and small business owners supposed to hear the data signal through all the seasonal noise?

Here are some tips help you interpret economic data while the seasonal winds of the pandemic are still blowing.

Don’t fixate on any one point. Consider the last two to three months of data before forming an opinion on what’s happening in the economy. Instead of focusing on the magnitude of a particular report, look at the direction of the data and whether it’s speeding up or slowing down. 

Consider new benchmarks. Instead of year-over-year trends, try comparing monthly numbers to the same month in 2019 or an average period before the pandemic.

Watch for new trends. So much has changed in the economy. There’s more e-commerce and telework, consumer spending has shifted toward goods from services, the list goes on.  Some of those trends might be more permanent than others. 

Look beyond the headlines. Examine the granular data to get the big picture. How does the data differ by age, gender, industry, or employer size? Looking deeper can provide a better lens on the dynamics of the broader economy.

Last, but not least, keep reading the Main Street Macro. We’re your guide to the economy through all its ups and downs.

Have a question about the pandemic economy? Maybe we can help. Email us at [email protected]