Commenters have called me out for making this mistake in the past, so I thought it would be useful to link to this post from Economix that explains how GDP growth rate measurements work. First, a handy chart:
As you can see, the confusion is around the length of time. During the fourth quarter of 2008, the GDP dropped 1.6 percent from its third quarter level. But forecasters are used to thinking in year-long terms, so this is reported as a 6.2 percent annualized drop in GDP -- what would happen if the same trend in the fourth quarter continued for an entire year. Both basically say the same thing, but the annualized rate makes it look a lot scarier.
As you can see, the confusion is around the length of time. During the fourth quarter of 2008, the GDP dropped 1.6 percent from its third quarter level. But forecasters are used to thinking in year-long terms, so this is reported as a 6.2 percent annualized drop in GDP -- what would happen if the same trend in the fourth quarter continued for an entire year. Both basically say the same thing, but the annualized rate makes it look a lot scarier.-- Tim Fernholz
