What is SAAR - it sounds like a disease!

SAAR - stands for seasonally adjusted annualized rate. This is frequently used in economics when looking at or comparing different statistical data. The basic reason SAAR is used is to remove fluctuations that may influence the data due to seasonality.

A classic example would be data on ice cream sales. To compare ice cream sales from February to August we must first account for the seasons , namely in February it is the dead of winter and you are much less likely to consume ice cream versus in August when it may be over 100 degrees in the northern hemisphere when you might consume more than your share of the tasty stuff.

To compare this data apples to apples, economists frequently adjust the monthly data by applying a seasonal factor. So what is this magical seasonal factor you might ask? The seasonal factor is actually derived from a lot of the historical data in our case ice cream sales. After studying the data a pattern emerges from which seasonal factors can be constucted.

So in our example the measly true sales number from February is divided by the seasonal factor to arrive at a seasonally adjusted number of ice cream sales that we can now compare to the ice cream sales in August. As you may have guessed the seasonal factor for ice cream in Feburary in our example would be less than 1 and for the month of August it would be greater than 1.

Since this post is getting quite large and I haven't explained anuualized part I will tackle that in the next post.