“I must find out what the January employment report means,” said Alice. “Is employment larger or smaller? Will bond yields go up or down? And what will happen to stocks?”
A sign hung from a large mushroom with the legend, “Bureau of Labor Statistics.” Alice stretched herself up on tiptoe, and peeped over the edge of the mushroom. Her eyes immediately met those of a large blue caterpillar that was sitting on the top with its arms folded, quietly smoking a long hookah, and wearing a badge that read, “Chief Labor Market Economist.”
“Please, sir,” Alice said, “Did employment go up or down in January? The ADP report says that it fell by 301,000 but the Bureau of Labor Statistics says that it rose by 476,000. “I can’t understand it myself,” she confessed. “The employment report being so many different sizes in a day is very confusing.”
Caterpillar took the hookah out of its mouth and yawned once or twice and shook itself. Then it got down off the mushroom and crawled away in the grass – but stopped and turned to remark, “One side will make the employment report look bigger, and the other side will make the employment report look smaller.”
“One side of what? The other side of what?” thought Alice to herself.
“Of the mushroom,” said Caterpillar, just as if she had asked it aloud.
Alice circled to the left of the mushroom, and read the inscription, “Seasonally Adjusted.” Then she went to the other side of the mushroom where the inscription read, “Not Seasonally Adjusted.”
“Taste the seasonally adjusted side,” demanded Caterpillar.
Alice did as the insect bade her, and felt her legs and neck extending until she towered far over the mushroom. “You are now seasonally adjusted,” cried Caterpillar from far below her, “like the employment report. Because stores hire so much temporary labor for the Christmas season, and let it go in January, we count a smaller-than-usual drop in January employment as a seasonally-adjusted gain.”
“I don’t understand that at all,” said Alice.
“No one else does either,” conceded Caterpillar. “Now taste the other side of the mushroom.”
Alice bent over and broke off the smallest piece she could from the other side of the mushroom. No sooner had she placed it on her tongue than she began to shrink. Now she was looking up at a giant Caterpillar among blades of grass that seemed taller than oak trees.
“You are now unadjusted,” Caterpillar said.
“As you can see,” said Caterpillar, “employment – the dashed line – falls at the beginning of each year as temporary workers are let go after the holiday season. Only 2.8 million workers were let go, a bit fewer than usual, so the seasonally adjusted equivalent of a loss of 2.8 million jobs is a gain of 476,000 jobs.”
“But you are assuming that seasonality is a recurring pattern,” Alice objected. “Look at the huge drop in employment during 2020 due to the Covid-19 epidemic! How can you be sure that seasonality has the same effect now that it did in the past? That seems a bit unreal.”
“Of course it’s unreal,” said Caterpillar. “You are in Wonderland.”
“There must be someone else here who can make sense of all of this!” cried Alice.
“Why don’t you ask Humpty-Dumpty?” offered Caterpillar?”
“I did,” Alice said as she left. “He told me, ‘Statistics mean what I want them to mean.’”