The gross domestic product (GDP) growth rate measures how fast the economy is growing. The rate compares the most recent quarter of the country's economic output to the previous quarter. Economic output is measured by GDP.
The current U.S. GDP growth rate is 2.0%. That means the U.S. economy expanded by 2.0% in the third quarter of 2021, according to the third estimate by the Bureau of Economic Analysis (BEA) for the third quarter.
This increase follows a second-quarter 2021 increase of 6.7%. GDP growth for the second quarter of 2021 was the fourth continuous quarterly increase in GDP, with growth rates not seen since 1998 (a growth rate of 6.6% in the fourth quarter). The last time GDP growth reached that level before 1998 was the second quarter of 1955.
- The GDP growth rate indicates how quickly the economy is growing or shrinking.
- GDP is driven by four components, the largest of which is personal consumption.
- GDP growth reveals where the economy is in the business cycle.
- Real GDP adjusts for inflation and so must be used to compare between years.
The 4 Components of GDP
The GDP has four components: personal consumption, business investment, government spending, and net trade. The primary driver of GDP growth is personal consumption, which includes the critical sector of retail sales. Next is business investment, which includes construction and inventory levels.
Government spending is the third driver of growth. Its largest categories are Social Security benefits, defense spending, and Medicare benefits. The government often increases this component to jump-start the economy during a recession.
Finally, the fourth component is net trade, or exports minus imports. Exports add to GDP while imports subtract from it.
Below you can see how the quarterly GDP growth rate has changed over time, from 2007 to 2021.
Why the GDP Growth Rate Is Important
The GDP growth rate is the most important indicator of economic health. The Bureau of Economic Analysis often updates its GDP estimates as new data comes in. Those revisions impact the stock market as investors react to this new information.
The GDP growth rate reveals which of the four stages of the business cycle the economy is in: peak, contraction, trough, and expansion.
The GDP growth rate is positive when the economy is expanding. If it's growing, so will businesses, jobs, and personal income. The ideal growth rate is between 2% and 3%. It hits a peak if it expands beyond that for too long. The bubble bursts at that point, and economic growth stalls.
If the economy contracts, then businesses will hold off investing in new purchases. They’ll delay hiring new employees until they are confident the economy will improve. Those delays further depress the economy. Without jobs, consumers have less money to spend.
The country's economy is in a recession if the GDP growth rate turns negative. Negative growth is when GDP is less than the previous quarter or year. It will continue to be negative until it hits a trough. That’s the month things start to turn around. After the trough, GDP usually turns positive again.
GDP Growth Rate Formula
The BEA provides a formula for calculating the U.S. GDP growth rate. Here's a step-by-step example for the third quarter of 2021:
- Go to Table 1.1.6, Real Gross Domestic Product, Chained Dollars, at the BEA website.
- Divide the annualized rate for Q3 2021 ($19,465.2 trillion) by the Q2 2021 annualized rate ($19,368.3 trillion). You should get 1.0050.
- Raise this to the power of 4. (There's a function called POWER that does that in Excel). You should get 1.020.
- Subtract one. You should get 0.20.
- Convert to a percentage by multiplying by 100. You should get 2.0%
You should get the same rate as the BEA's estimate for GDP growth for that quarter with this equation.