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Annual Rates

You're cruising down the highway at 65 miles per hour. Whether your destination is actually 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 were 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 were sustained for a full 12 months.

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