Quarterly GDP growth terminology: YoY vs QoQ

Question

Quarterly GDP growth can be calculated either in terms of YoY change or — in the case of seasonally adjusted data — in terms of QoQ change. (A third option would be to annualize the QoQ rate.)

To start with a current example: In the U.S., GDP in Q1 2018 grew by 2.9% compared to Q1 2017 (= YoY), whereas it grew by 0.7% compared to Q4 2017 (= QoQ).

In Q4 2017, however, YoY growth was at 2.6%, whereas QoQ growth was at 0.7%. So GDP growth in Q1 2018 was higher compared to the previous quarter in terms of YoY (2.6% -> 2.9%), whereas it was slightly lower compared to the previous quarter in terms of QoQ (0.7% -> 0.6%).

Now in judging an economy's growth momentum, analysts typically focus on changes in QoQ growth rates - in the example above coming to a conclusion like "growth in the U.S. slightly lost momentum in Q1 2018".

My question is: Is there a different term to express changes in the YoY rate? To stay with the example above, if I comment on the fact that the U.S. YoY rate is up to 2.9% from 2.6%, concluding that there was a “strengthening of growth momentum” might be misleading (especially given the diverging picture based on changes in the QoQ rate).

Answer 1

I have to highlight a flaw in the premise of your question.

For the quarterly NIPA statistics published and reported by the Bureau of Economic Statistics (bea.gov) under the U.S. Dept. of Commerce, the real growth rate shown in Table 1.1.1 in an annualized statistic based on the estimate of the QoQ level change in the real/constant-dollar value of the economy.

Current dollar quarterly values are given in Table 1.1.5. Real dollar quarterly values are given in Table 1.1.6. The growth rate reported in Table 1.1.1 is calculated from the values in Table 1.1.6 as follows: $$ 100\% * \left( \left( \frac{V_{q}}{V_{q-1}} \right)^4 - 1 \right). $$

This gives you the annualized growth rate.

The annual growth rate is YoY: $$ 100\% * \left( \left( \frac{V_{q}}{V_{q-4}} \right) - 1 \right). $$

And the quarterly growth rate is QoQ: $$ 100\% * \left( \left( \frac{V_{q}}{V_{q-1}} \right) - 1 \right). $$

Answer 2

As long as you clearly label what you are doing, there’s probably a lot of ways of phrasing the change in the year-on-year growth rate. However, anyone with experience will take those changes with a large grain of salt, as a result of “base effects.”

For relatively low growth rates, the annual rate of change is roughly equal to the sum of non-annualised quarterly growth rates over the last four quarters (or the average of annualised growth rates for 4 quarters). The change in the annual growth rate on quarter is therefore driven by the difference between the latest quarter, and the quarter that dropped out of the annual average. If that previous period was abnormally low, the current annual growth rate will jump higher, even if the quarterly growth rate is unchanged.

Since that hardly represents new information about the economy, that jump is not providing a lot of new information - we knew about that weak quarter for a long time.

Year-on-year changes are a great for time series plots, but you need to dig further if you want to discuss acceleration/deceleration.