How Did the U.S. Economy Do Last Year? Explaining Two Measures of GDP Growth

One of the primary measures that economists use to track the performance of the U.S. economy is real gross domestic product (GDP), which captures the total inflation-adjusted value of the final goods and services that the economy produces over a period of time. The U.S. Bureau of Economic Analysis (BEA) computes this measure for each quarter of the year and updates estimates for past quarters as more data become available.

When assessing the performance of the economy in a given year, it is common to consider the annual percent change in real GDP—that is, its growth rate. But what growth rate? One number often cited is the Q4-over-Q4 (Q4/Q4) growth rate, which was 2.5% in 2024 using recent estimates.We used data from the BEA’s Jan. 30, 2025, release, Gross Domestic Product, 4th Quarter and Year 2024 (Advance Estimate) (PDF). Another number frequently quoted is the year-on-year (Y/Y) growth rate, which was 2.8% in 2024. So, which should we use?

This blog post explains the differences between the Q4/Q4 and Y/Y measures and why economists might prefer one over the other.

The Q4-over-Q4 Growth Rate

Perhaps the most-used measure of the annual growth of the U.S. economy is the Q4/Q4 growth rate, which compares the level of GDP in the fourth quarter of a year (the months of October, November and December) with the corresponding quarter of the previous year. It is calculated as follows:

In the fourth quarter of 2024, the U.S. economy produced final goods and services worth roughly $5.88 trillion in real terms, according to the BEA.We take the BEA’s data in chained 2017 dollars, seasonally adjusted at an annual rate, and divide by four to get the quarterly flow of real GDP. That compares with $5.74 trillion over the same period of 2023, adjusted for inflation, resulting in a Q4/Q4 growth rate of approximately 2.5%.

This measure is widely used because it is roughly equal to the simple average of the growth rates in each of the four quarters of the year. Specifically, if we think of the productive capacity of the economy as growing quarter by quarter—so that the level of GDP in the fourth quarter of the year is the accumulation of growth in the first, second, third and fourth quarters—then the Q4/Q4 growth rate approximates the simple average of the annualized growth rates that occurred in each quarter individually.This can be shown by taking a first order Taylor series approximation. Thus, this measure provides a simple summary of the growth experience of the U.S. economy over the preceding year.

However, the Q4/Q4 growth rate is not ideal for all purposes. For one, the measure only uses data on the flow of production in the fourth quarter and no other quarters throughout the year. This means two years with very different patterns of growth within each year can end up having the same Q4/Q4 growth rate.

In addition, everything else equal, a year with a greater total flow of production is better than a year with a smaller total flow. This leads us to our next measure of annual GDP growth.

The Year-on-Year Growth Rate

A second widely used measure of annual GDP growth is the Y/Y growth rate, which sums the flow of all production within each of the four quarters of a year and compares it with the total flow of production in all four quarters of the previous year. It is computed as follows:

The BEA estimates that the U.S. economy produced roughly $23.3 trillion worth of final goods and services in 2024, compared with $22.67 trillion in 2023 after adjusting for inflation.These GDP levels are given in chained 2017 dollars. This means the Y/Y growth rate was 2.8%.

The Y/Y measure is less popular with some economists because, using the same approximation method as above for the Q4/Q4 measure, the Y/Y measure can stray far from the simple average of quarterly growth rates throughout the year. In fact, it depends on the pattern of growth rates within the previous year.

Specifically, this measure places more weight on economic growth in the fourth quarter of the previous year and the first quarter of the current year than it does on growth in other quarters. This can be a weakness when using the data to determine the beginning and end of economic expansions. Nonetheless, when comparing the total flow of production in one year with another, this may be entirely appropriate: Everything else equal, the greater the growth rates in the fourth and first quarters, the greater the difference in the total flow of production across the two years.

Real-World Examples

In practice, the Q4/Q4 and Y/Y measures of annual real GDP growth are often similar. But in any given pair of years, they can and do differ. As the discussion above indicates, the differences can be significant when economic events are extreme at the very end of one year or at the very start of another year. They also can be significant when there is a short, sharp contraction in GDP in the middle of the year, such as like what happened during the COVID-19 pandemic.

2020 versus 2019

The lockdown measures imposed in the U.S. in response to the pandemic began in March 2020. Hence, as the figure below illustrates, their economic impact was felt most significantly during the second quarter of 2020, with real GDP falling by 7.9% compared with the first quarter. In many states, these lockdown restrictions were short-lived. The U.S. economy rebounded sharply in the third quarter, growing 7.8% compared with the second quarter.

The COVID-19 Pandemic and Real GDP, 2019-20

SOURCE: Bureau of Economic Analysis.

NOTES: The figure uses chained 2017 dollars. Quarterly levels are at a seasonally adjusted annual rate.

Comparing the two measures, the Q4/Q4 annual growth rate in real GDP was -1% in 2020, whereas the Y/Y annual growth rate was -2.2%. The difference is due to the sharp decline in GDP within 2020, which was largely reversed by the end of the year. For assessing the impact of these events on the U.S. economy, the Y/Y measure gives a better impression of the total decline in the flow of production.

1975 versus 1974

In the 1970s, the U.S. was negatively affected by sharp increases in the prices of crude oil and gasoline. The first increases resulted from an oil export embargo instituted by the Organization of Arab Petroleum Exporting Countries in October 1973. Although this embargo was lifted in March 1974, oil prices remained high, averaging $11 a barrel in the 1970s, up from $1.30 in the late 1960s. This resulted in a sustained period of economic volatility for the U.S., illustrated for 1974 and 1975 in the figure below. The figure shows that economic activity generally declined throughout 1974, bottoming in the first quarter of 1975.

The 1973 Oil Crisis and Real GDP, 1974-75

SOURCE: Bureau of Economic Analysis.

NOTES: The figure uses chained 2017 dollars. Quarterly levels are at a seasonally adjusted annual rate.

As discussed above, sharp changes in economic activity at the end of one year and start of another can lead to significant differences between the Q4/Q4 and Y/Y measures of annual real GDP growth. This is seen here, as the Q4/Q4 measure for 1975 recorded a growth rate of 2.6% compared with a growth rate of -0.2% for the Y/Y measure. The former measure indicates reasonable growth in 1975, whereas the latter measure more accurately captures the economic difficulties of the time.

Q4-over-Q4 and Year-on-Year Growth Rates over Time

The next figure plots the Q4/Q4 and Y/Y measures of annual real GDP growth for each year since 1948. It shows that the differences between the two are often small. But as the COVID-19 and oil embargo examples indicate, in any given year the difference between these growth rates can be significant and, as in 1975, they can have different signs.

Differences between Q4/Q4 and Y/Y Growth Rates, 1948-2024

SOURCE: Bureau of Economic Analysis.

NOTES: The figure shows percent change from the previous period. It uses chained 2017 dollars, and quarterly data are measured at a seasonally adjusted annual rate.

However, this figure also points to an issue with using the Y/Y measure as a summary of real GDP growth—one that is visible in the growth experiences of 2008 and 2009. As is well known, the U.S. economy started contracting in late 2007 amid the beginnings of the 2008 global financial crisis. This is reflected in the Q4/Q4 data for 2008, which show a sharp decline in real GDP. However, the Y/Y measure remains slightly positive in 2008 and only contracts notably in 2009. Thus, looking at Y/Y growth rates may give a misleading impression of the beginning of an economic contraction.

Which Measure Should You Use?

The choice of an appropriate economic measure depends on the purpose for which it will be used. If you are interested in producing a summary measure of real GDP growth throughout a year, it is probably best to use the Q4/Q4 measure because it most closely approximates the simple average of quarterly growth rates. (Of course, you could just take the simple average of the year’s quarterly growth rates, too.) Importantly, this measure is not affected by patterns of growth within the preceding year, which can make it hard to ascertain the timing of business cycles.

If you are attempting to assess which year was “better” for U.S. households, and if you are comfortable abstracting from all the other considerations that affect household welfare, then the Y/Y measure is likely best.

Notes

1. We used data from the BEA’s Jan. 30, 2025, release, Gross Domestic Product, 4th Quarter and Year 2024 (Advance Estimate) (PDF).
2. We take the BEA’s data in chained 2017 dollars, seasonally adjusted at an annual rate, and divide by four to get the quarterly flow of real GDP.
3. This can be shown by taking a first order Taylor series approximation.
4. These GDP levels are given in chained 2017 dollars.