Q&A: the value of year-over-year comparisons

Year-over-year figures are the bread-and-butter measurement of economic activity. When analysts want to know just how well a company or industry is performing, they compare current results to ones from a year earlier to see the big picture.

But what happens when one year ago happens to be when the worst economic crisis in decades struck? Do year-over-year figures tell an accurate story during a time of rapid change?

That question will be on the minds of economists and stock analysts over the next 12 months as they try to make sense of corporate profits and economic indicators. The figures inevitably will be skewed when compared with a year of bankruptcies, layoffs and economic recession.

What are the most common figures that are expressed in year-over-year terms?

The most popular year-over-year figures are corporate earnings. Stock analysts don't just care if a company turns a profit -- they want to know how that profit compares with the past. That's why a company can make money but still see its stock price decline, because the profits shrank from a year earlier.

Why compare with the same period a year ago? Isn't it significant to see how a company did compared with the previous few months?

Year-over-year figures help reduce seasonal variations in data. For example, Wal-Mart Stores Inc. might see its sales tank during the first quarter of the year when compared with the previous quarter, but that's because the holiday shopping season came and went during the fourth quarter.

What analysts really want to see is how the first quarter stacked up against a similar period, like the first quarter in the previous year.

Why aren't monthly unemployment rates and other economic indicators expressed in year-over-year figures?

Sometimes researchers can weed out seasonal variations in data, freeing them to compare current numbers with, say, ones from a month or a quarter ago. For example, the Labor Department seasonally adjusts its unemployment figures, using mathematical formulas to smooth out big changes in the work force that occur regularly, such as the springtime influx of construction jobs.

So what happens when there are huge changes over a given year?

That's when year-over-year comparisons break down in their usefulness. Analysts don't throw the figures out the window, but they don't rely on them exclusively either. Instead, year-over-year figures become less important.

What did last fall's financial collapse mean for year-over-year figures over the past year?

Basically, everything looked worse last year. Companies reported earnings that were compared with the same period in 2007 or 2008, before the global economy fell in a hole. That made last year's profits look awful in many cases.

What should we expect this year as companies report profits that will be compared with the downturn of 2008-09?

Steven Stanley, chief U.S. economist at RBS, is going to be wary of too much good news. Corporations will compare this year's profits to a dismal previous year, which means relatively weak profits could still be a double-digit increase over the year before.

In other words, results that aren't so good could look really strong because a really weak year is being used as the baseline for comparison.

Does that mean this year's performance should be thrown out altogether?

Stanley doesn't think so, but he will take the figures with a grain of salt. For example, he might compare this year's third-quarter earnings with last year's -- but also compare them with earnings from two years ago, in 2007. That will help him gauge how the performance ranks against the company's old "normal" baseline.

What should analysts look at over the next year or two to gauge economic growth?

During the economic recovery, it will be important to look at month-to-month performance, said Steven Wieting, economist at Citi Global Markets.

Few people expect an economic boom to deliver profits or production to "normal" pre-recession levels anytime soon. What's important, Wieting said, is how companies perform incrementally as they dig out.

When will year-over-year figures become more reliable?

Things will have to stabilize into a new baseline for year-over-year comparison to become really meaningful. It will take another year or two of steady growth to build that baseline.

If economic conditions change dramatically again, though, all bets will be off.