Year-Over-Year (YOY Growth): Calculation, Definition

Advantages, Disadvantages and Examples

year over year
This architect is calculating the year-over-year growth rate right now. Photo: Klaus Vedfelt/Getty Images

Definition: Year-over-year is a financial term that means a comparison of one period to the same period last year. The period is usually a month or quarter. The year-over-year growth rate calculates the percent change during the past twelve months.

Year-over-year is an effective way of looking at performance for two reasons. ​First, it removes seasonalities. For example, say your business revenue rose 20 percent last month.

Before you break out the bubbly, check it against the income from the same month last year. Your sales might be down year-over-year if sales typically rise 35 percent this time of year. Your business is doing worse, not better. 

Second, it discerns long-term trends. Say a business is growing at a nice, steady 2 percent a month. But if it grew 3 percent a month last year, it will be down when compared year-over-year.

For this reasons, make sure you check what comparisons a financial report is using. Are the authors comparing the data to the last period (quarter, month, week, day) or to the previous year? Also, check to see if they are using the calendar year or fiscal year.

Pros and Cons

The biggest advantage of year-over-year comparisons is that they automatically negate the effect of seasonality. For example, retail statistics rise each November and December. But that's because of the holiday shopping season.

It's the most critical time of the year because almost 20 percent of retail sales occur then.

Year-over-year analysis helps smooth out any volatility in the month-to-month numbers. For example, investors should have used the year-over-year comparison in June 2011. The Bureau of Labor Statistics reported that the economy only added 18,000 jobs.

They panicked because it was less than the 25,000 jobs added in May and the 217,000 jobs added in April. The unemployment rate rose to 9.2 percent. The stock market dropped, and the prices of safe haven investments like Treasurys and gold sky-rocketed. Thanks to that panic, gold hit an all-time high of $1,895 an ounce a few months later.

But the year-over-year calculation showed that the number of employed people had increased 1.8 million between June 2010 and June 2011. That showed the economy’s recovery had not derailed. Find out more recent examples in the Current Jobs Report and the Current Unemployment Report.

Don’t rely on year-over-year alone. It's a good idea to look at month-to-month as well to get the full picture. That's why most business news reports monthly trends. You usually have to seek out the year-over-year number yourself.

How to Calculate the Year-Over-Year Growth Rate

To calculate the year-over-year growth rate, you need two numbers and, of course, a calculator. Then take these three steps.

  1. Subtract last year's number from this year's number. That gives you the total difference for the year. Hopefully, it's positive and indicates a year-over-year gain, not a loss.
  2. Then, divide the difference by last year's number.
  1. That gives you the year-over-year growth rate.

Let’s return to the employment example. In June 2011, total employment was 131.017 million. Total employment in June 2010 was 130.021 million. Here's how to calculate the year-over-year growth rate.

  1. Subtract 130.021 million from 131.017 million. The difference is .996 million, or 996,000.
  2. Divide .996 million by 130.021 million, last year's employment number.
  3. The answer is 0.8 percent. That's the year-over-year growth rate.

Examples

Most government statistics are month-to-month or quarter-to-quarter. You'll need to calculate the year-over-year numbers yourself to get the full picture. Here are three leading economic indicators where it's important to do year-over-year calculations:

  1. Durable Goods: The Commerce Department reports this statistic month-to-month. But YOY calculations warned of the Great Recession as early as October 2006.
  1. Manufacturing Jobs: American has been losing manufacturing jobs on a monthly basis for years. But when they started declining YOY in 2007, it was a sign of the coming recession.
  2. Gross Domestic Product:  It says how fast the economy grew in last quarter. Fortunately, the Bureau of Economic Analysis annualizes the growth rate so it can compare it to the previous year. That means the BEA reports how much the economy would produce for the entire year if it continued growing at this rate. It then compares this annualized rate to last quarter's annualized rate. Here's how the BEA calculates the GDP growth rate