Annual Rates

You’re crui s ing down the highway at 65 mi les per hour. Whether your des t inat ion i s actu-
ally 65 miles away is not important. What counts is what your speedometer tells you: If
you keep up this driving pace for a full hour, you will travel about 65 miles.
The term “miles per hour” is used to measure relative speed. A similar relationship
exists with economic indicators. A common way to compare how fast the economy is
growing is to measure changes in activity in the form of annual rates. For instance, the
government might report that autos were selling at a 14-million-vehicle annual rate the
previous month. That doesn’t mean automakers sold 14 million cars and trucks the month
before; it’s how many will be sold if last month’s pace is maintained for each of the next
12 months. Why do it this way? The reason is experts find it easier to look at performance
on a yearly basis.
The methodology used to annualize a figure is simple enough: To turn a monthly
level into an annual rate, simply multiply it by 12. If you have two months of data that
you want to annualize, multiply it by 6. If it’s a quarterly change—which is how the GDP
is reported—multiply the three-month change in activity by 4. Thus, whenever you see an
economic indicator reported in an annual rate, it is telling you what will happen if that
pace is sustained for a full 12 months.
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