International Journal of Forecasting 20 (2004) 551 – 556

www.elsevier.com/locate/ijforecast

Seasonal adjustment perspectives on ‘‘Damping seasonal factors:

shrinkage estimators for the X-12-ARIMA program’’
David F. Findley *, Kellie C. Wills, Brian C. Monsell
U.S. Bureau of the Census, Statistical Research Division, Room 3000-4, Washington, DC 20233-9100,USA

Abstract

We examined the shrinkage methods of Miller and William from the perspective of seasonal adjustment rather than
forecasting, restricting attention to their performance on the approximately 500 of the 1428 M3 series that are seasonal and have
multiplicative seasonality. Local shrinkage improved the quality of the seasonal adjustment of enough of these series that almost
50% have acceptable automatic X-12-ARIMA adjustments, instead of 40% with no shrinkage. For a few series, global
shrinkage produced demonstrably incorrect results, and for some of these series and also others improved by local shrinkage,
the SEATS seasonal adjustment provided by an experimental version of X-12-ARIMA offered still greater improvements. No
benefits were observed from global shrinkage.
D 2004 International Institute of Forecasters. Published by Elsevier B.V. All rights reserved.

Keywords: Seasonal adjustment quality; Residual seasonality; Spectrum; SEATS

1. Seasonal adjustment diagnostics for the
M3 series
When we were presented with the initial version
of the paper, it seemed unlikely to us that all of the
1428 M3 series in Miller and Williams’ forecasting
experiment (section 5) could be suitable for multi-
plicative seasonal adjustment. A first diagnostic
pass through the M3 series showed that about
46% of them lack well-defined seasonal peaks in
their spectrum and are therefore unlikely candidates
for seasonal adjustment of any kind. Among the
series with seasonal spectral peaks, we identified
* Tel.: +1-301-457-4983; fax: +1-301-457-2299.
E-mail address: david.f.findley@census.gov (D.F. Findley).
283 series for which an additive adjustment is
indicated instead of a multiplicative adjustment
using X-12-ARIMA’s likelihood-based automatic
transformation selection procedure. We are pleased
that Miller and Williams responded to these find-
ings by reporting forecasting results separately for
nonseasonal series and for series that should be
additively adjusted.
For the remaining series, which are candidates for
multiplicative seasonal adjustment unless additional
diagnostic statistics suggest otherwise, we examined
the Q2 statistic and several M statistics (M7, M8,
M10, and M11) of X-12-ARIMA (and X-11-ARIMA).
These are described in Ladiray and Quenneville (2001)
and are commonly used by agencies, such as the
Census Bureau, to detect seasonal adjustments of
insufficient quality for publication. For the purposes

0169-2070/$ - see front matter D 2004 International Institute of Forecasters. Published by Elsevier B.V. All rights reserved.
doi:10.1016/j.ijforecast.2004.03.008
552 D.F. Findley et al. / International Journal of Forecasting 20 (2004) 551–556
of this study, we considered a seasonal adjustment to
be tentatively acceptable if none of these statistics was
greater than 1.1. Miller and Williams report forecasting
results for the remaining series under the ‘‘Fail diag-
nostics’’ category.
Failing diagnostics for a seasonal adjustment
indicates that there may be substantial uncertainty
associated with the adjustment. Adjustment uncer-
tainty becomes a component of the forecast uncer-
tainty for any method that forecasts and then
reseasonalizes the adjusted series. This suggests that
a forecasting method should be sought for such
series that does not rely on its seasonal adjustment,
if reliable forecasting of the original series is the
goal.
We chose the Q2 and M diagnostics mentioned for
simplicity. The M diagnostics selected are those most
likely to be improved by smoothing the seasonal
factors. Q2 is a weighted average of these and other
M statistics. Use of other kinds of diagnostics, such as
the spectrum or the sliding spans stability diagnostic
(Findley, Monsell, Shulman, & Pugh, 1990), would
result in different decisions for some series. Further-
more, some nonautomatic choices of seasonal filters
or shortened data spans might result in acceptable
diagnostics for series whose automatic adjustments
have failing diagnostics.
We found 40 series in the ‘‘Fail diagnostics’’
category for which local shrinkage improved the X-
12-ARIMA adjustment to the extent that the local
shrinkage adjustments had passing Q2 and M statis-
tics. (Miller and Williams report forecasting results for
these series in the ‘‘Local OK’’ category.) We did not
find any series for which global shrinkage improved
the adjustment enough to pass diagnostics. For this
reason, we concentrated on the local shrinkage meth-
od and on the series for which it produced passing Q2
and M statistics when X-12-ARIMA did not. We
expect that a study of the series that are candidates
for additive seasonal adjustment would yield similar
results.
2. Effects of local shrinkage on seasonal factors
When the local shrinkage procedure has a clearly
visible impact on a calendar month’s seasonal factors,
it usually smoothes their year-to-year evolution. The
seasonal-factor-by-month plots in Fig. 1 show the 12
time series of seasonal factors of the different calendar
months January,. . ., December. The horizontal line
through each series is the average value of that
calendar month’s seasonal factors. The adjustments
shown are from M3 series number 580. The first plot
is for the X-12-ARIMA adjustment with no shrinkage;
the program selected a 3  5 seasonal filter for this
series. The second shows dramatically smoothed
factors from local shrinkage, with a much smaller
range of seasonal factors in most months. This
improves the adjustment enough that it has acceptable
M and Q2 statistics. The third shows the factors of the
SEATS seasonal adjustment, from the hybrid version
of X-12-ARIMA and SEATS under development by
Brian Monsell with the aid of Agustin Maravall and
Gianluca Caporello (Monsell, Aston, & Koopman,
2003).
The SEATS seasonal factors for this series are very
smooth for each calendar month because the estimated
seasonal moving average parameter, H, of the auto-
matically chosen seasonal ARIMA model is 0.854.
The model is the Box –Jenkins airline model. For a
seasonal time series Zt with s z 2 observations per
year, this model has the form (1-B)(1-Bs)Zt=(1-hB)
(1-HBs)et with et purely random (independent with
mean zero and constant variance). By contrast, X-12-
ARIMA automatically chooses a 3  5 seasonal filter
for this series, which results in seasonal adjustment
filters close to the SEATS filters for an airline model
with H about 0.60 (Findley & Martin, 2003; Planas &
Depoutot, 2002). The SEATS filters associated with
the larger H of 0.854 have weights that decay much
more slowly than those that occur with the 3  5
seasonal filter. Thus, shrinkage seems to have effec-
tively lengthened the X-12-ARIMA filters so that they
more closely resemble the SEATS filters for this
series.
We saw this phenomenon repeatedly. When a
model had a H value greater than 0.73, which usually
led to SEATS seasonal factors that were smoother
than those of automatically chosen X-11 filters, Miller
and Williams’ shrinkage methods tended to substan-
tially smooth the X-11 seasonals. (A range of H from
0.36 to 0.73 yields SEATS seasonal adjustment filters
close to X-11 filters that can be automatically chosen
by X-12-ARIMA and X-11-ARIMA; see Planas &
Depoutot, 2002). We also found two series, 558 and
 D.F. Findley et al. / International Journal of Forecasting 20 (2004) 551–556 553

Fig. 1. (a) X-12-ARIMA seasonal factors by month for series 580 (no shrinkage applied). (b) X-12-ARIMA seasonal factors by month for series
580 (local shrinkage applied). (c) SEATS (model-based) seasonal factors by month for series 580.
554 D.F. Findley et al. / International Journal of Forecasting 20 (2004) 551–556
1063, for which H was less than 0.3 and whose
SEATS factors were less smooth than X-12-ARIMA’s
factors, whereas those from local shrinkage were
smoother.
3. Effects of local shrinkage on seasonal
adjustment diagnostics
We examined additional diagnostics for the 40
series for which local shrinkage produced passing
Q2 and M statistics when X-12-ARIMA did not.
For four of these series (519, 580, 1063, and 1326),
the local shrinkage adjustment had a seasonal peak in
the spectrum of either the seasonally adjusted series or
the irregular component, but the X-12-ARIMA ad-
justment had no seasonal spectral peaks. This means
that the smoother adjustment resulting from local
shrinkage has seasonality and is therefore unaccept-
able as a seasonal adjustment. For example, in Fig. 2,
the local shrinkage adjustment for series 519 has a
peak in the spectrum of the irregular component at 3
cycles/year. (The irregular component is the detrended
seasonal adjustment.) The SEATS seasonal adjust-
ment did not exhibit residual seasonality for any of
these four series.
Comparison of Fig. 1b and c suggests that the local
shrinkage has led to seasonal factors for some calen-
Fig. 2. Spectrum of irregular component for X-12-ARIMA adjustment (solid line) and local shrinkage adjustment (dotted line) of series 519.
dar months of series 580 that are incorrectly centered;
that is, the shrinkage has been toward incorrect mean
values: compare the means of successive pairs of
calendar months in the two figures. The basic premise
of local shrinkage, that any similar seasonal factor
estimates from different calendar months within a year
should be made more alike, is a device for dealing
with high noise levels that is not intrinsically natural,
and in the case of series 580, clearly incorrect. (There
is usually no reason to expect two different calendar
months to have seasonal factors that are close.)
For the other three series, local shrinkage did
substantially more smoothing than SEATS, so the
residual seasonality indicates oversmoothing. For
most of the remaining 36 series, local shrinkage
provides useful benefits: After subtracting the eight
series for which adjustments with (and without)
shrinkage are very unstable, according to the sliding
spans diagnostic, the final result is that local shrinkage
increases the number of series with acceptable X-12-
ARIMA multiplicative seasonal adjustments by 24.
To put the preceding findings in perspective, we
looked at the 195 series whose X-12-ARIMA multi-
plicative adjustments had passing Q2 and M statistics.
For 12 of these series, local shrinkage caused a
seasonal spectral peak to appear in the spectrum of
the seasonally adjusted series or the irregular compo-
nent, where the X-12-ARIMA adjustment had none.
 D.F. Findley et al. / International Journal of Forecasting 20 (2004) 551–556
By contrast, there were only two whose X-12-ARIMA
adjustments had seasonal spectral peaks and the local
shrinkage adjustments had none. There were three
series for which both adjustments had residual sea-
sonal peaks. We conclude that the importance of
examining spectra increases when local shrinkage is
used.
4. The simulation study
An important flaw in Miller and Williams’ simu-
lation study is its strong bias against the X-11 filters in
favor of shrinkage, resulting from their use of constant
seasonal factors for the majority of series. The longest
filter available from the automatic procedure in X-12-
ARIMA uses the 3  9 seasonal filter, which decays
very rapidly for use with a constant seasonal pattern.
(For the constant case, the ‘‘stable’’ seasonal filter
option is available.) When such fixed seasonality is
present, it seems a foregone conclusion that an auto-
matically chosen filter will be lengthened in a useful
way by shrinkage. The results for series with chang-
ing seasonal patterns should have been presented
separately.
5. Issues in the implementation of shrinkage
We have shown that local shrinkage results in
meaningful improvements to some otherwise unac-
ceptable adjustments. However, theoretical and prac-
tical questions about Miller and Williams’ procedures
remain.
As Miller and Williams discuss in their Appendix,
samples of SI ratios will not be independent due to
autocorrelation in the trend-cycle and irregular com-
ponents. The effect of correlation deserves consider-
ation: the motivation for shrinkage estimators in the
sense of James– Stein is their superior mean square
accuracy over the unshrunk estimators. With correlat-
ed data, shrinkage estimators with this property need
not exist; see the discussion and references of Manton,
Krishnamurthy, and Poor, (1998).
There are also implementation issues. One that has
not been considered is how to implement shrinkage
for series that require different X-12-ARIMA filter
lengths for different months. Another that might
555
need further research concerns the ends of the series.
Calculation of the global and local shrinkage factors
for a given month involves a 12-month rolling
window of X-12-ARIMA seasonal factors starting
6 months before the month in question. Consequent-
ly, for the first 6 months and last 5 months of a
series, some of the X-12-ARIMA seasonal factors
needed to calculate the shrinkage factors are missing.
For the beginning months of the series, Miller and
Williams set the absent X-12-ARIMA seasonal fac-
tors equal to the factors of the corresponding months
in the first year of data. For example, if the series
begins in January 1984, X-12-ARIMA seasonal
factors are needed for July – December 1983 (as
well as February –June 1984) in order to calculate
the January 1984 shrinkage factor. In this case, the
missing July –December 1983 X-12-ARIMA factors
are set equal to the July – December 1984 X-12-
ARIMA factors.
For the February 1984 factor, it seemed reasonable
to us to use the available January – July 1984 X-12-
ARIMA factors, setting only the missing August –
December 1983 factors equal to the August – Decem-
ber 1984 factors. Examination of Miller and Williams’
spreadsheet, however, shows that, in this case, they set
the August 1983 –January 1984 factors equal to the
August 1984– January 1985 factors, and so on for
each of the next five months of data. In the worst case,
for the June 1984 factor, five available X-12-ARIMA
factors (January –May 1984) are not used; they are
replaced by the January – May 1985 factors. Miller
and Williams agree with us (private communication)
that it would be better to use all available data as we
suggest, instead of replacing available observations
with later data.
For the most recent 5 months of the series, Miller
and Williams use X-12-ARIMA forecasts of the
missing factors, just as we would recommend. How-
ever, with local shrinkage, there was an implementa-
tion issue. Miller and Williams’ calculations produce
preliminary damping weights W* [as defined in equa-
tion (10)] for 7 months following the data span,
representing forecasted values of the X-12-ARIMA
seasonal components. These preliminary weights were
then included in subsequent shrinkage weight calcu-
lations [see equation (11)]. Miller and Williams agree
with us (private communication) that there is no
reason to use these seven damping weights.
556 D.F. Findley et al. / International Journal of Forecasting 20 (2004) 551–556
The results we reported in Section 3 were obtained
with a version of X-12-ARIMA that implements our
suggestions for factors at the beginning of a series and
does not use preliminary damping weights represent-
ing forecasted seasonals at the end of the series. These
changes had some impact on residual seasonality in
the shrinkage adjustments, as revealed by spectra.
Even if all of the implementation issues are
satisfactorily resolved, our results for the M3 series
suggest that the number of adjustments improved by
Miller and Williams’ shrinkage procedures may be
too small to justify the permanent incorporation of
shrinkage into X-12-ARIMA, given the complexity
and somewhat unnatural character of the local proce-
dure. Furthermore, future versions of X-12-ARIMA
will offer the alternative of model-based adjustments
like those of SEATS, and we have demonstrated that
this option can offer improvements similar to those
from shrinkage for many series. However, before
making a final decision about the utility of shrinkage
for seasonal adjustment, we plan to investigate it
further with both simulated and real series.
Disclaimer. This article is provided to encourage
discussion of issues related to shrinkage and seasonal
adjustment. The views expressed are those of the
authors and not necessarily those of the U. S. Census
Bureau.
Acknowledgements
We are grateful to Miller and Williams for the
considerable effort they have made to identify and
investigate the potential of two shrinkage methods for
improving X-12-ARIMA. We also thank them for
providing us with the Excel spreadsheet they used for
their calculations. This enabled us to produce an
experimental version of X-12-ARIMA implementing
their global and local shrinkage procedures, so that we
could examine the effects of the procedures in detail.
Our findings to date are summarized in the aforemen-
tioned comments.
References
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http://www.census.gov/ts/papers/rrs2003-02.pdf
Findley, D. F., Monsell, B. C., Shulman, H. B., & Pugh, M. C. (1990).
Sliding spans diagnostics for seasonal and related adjustments.
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Ladiray, D., & Quenneville, B. (2001). Seasonal adjustment with
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Manton, J. H., Krishnamurthy, V., & Poor, H. V. (1998). James –
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X-13? Proceedings of the Business and Economic Statistics
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