What Is the GDP Growth Rate?

Why It's Important, How to Calculate It

women buying new car
New car purchases are a great driver of GDP growth. Photo: Thomas_EyeDesign/Getty Images

Definition: The GDP growth rate measures how fast the economy is growing. It does this by comparing one quarter of the country's economic output (Gross Domestic Product) to the last.

The GDP growth rate is driven by the four components of GDP. By far, the most important driver of GDP growth is personal consumption, which includes retail sales. GDP growth is also driven by business investment, which includes construction and inventory levels.

Government spending is the third driver of growth. It's sometimes necessary to jumpstart the economy after a recession. Last, but not least, are exports and imports. Exports drive growth, but increases in imports have a negative impact.

Why Is the GDP Growth Rate Important?

The GDP growth rate is the most important indicator of economic health. When the economy is expanding, the GDP growth rate is positive. If it's growing, so will business, jobs and personal income.

If it's slowing down, then businesses will hold off investing in new purchases and hiring new employees, waiting to see if the economy will improve. That, in turn, can easily further depress the economy and consumers have less money to spend on purchases. If the GDP growth rate turns negative, then the country's economy is heading towards or is already in a recession. That's when the economy contracts, and GDP is less than the quarter or year before.

It occurs during the four phases of the business cycle.

It happened most recently in late 2008 / early 2009 when U.S. GDP growth was negative for four quarters in a row. The last time this happened was during the Great Depression. The growth rate turned positive in Q2 2008, and then turned negative again, prompting concerns about a double-dip recession.

In the 2001 recession, the growth rate was negative for only two quarters. To see all occurrences of negative economic growth, see History of Recessions.

What Is the GDP Growth Rate Formula?

The Bureau of Economic Analysis (BEA) uses real GDP to measure the U.S. GDP growth rate. Real GDP takes out the effect of inflation. Even though the growth rate is reported quarterly, the BEA annualizes it. That's so it can compare growth to the previous year. In other words, in any given quarter, the BEA reports what GDP is for the year. That removes the effect of seasons. If the BEA didn't do this, you would see a huge jump in GDP and the growth rate in every fourth quarter. That's because the holiday shopping season accounts for the greatest portion of annual retail sales, and therefore personal consumption.

Because so many things are measured, the BEA often revises the GDP growth rate within a month after releasing it. That can impact the stock market as investors get this new information about the state of the economy's health.

To see how much the BEA has revised its estimates, see GDP Current Statistics

The BEA provides a formula for calculating the U.S. GDP growth rate. Here's a step-by-step example to calculate the growth rate for the Fourth Quarter 2015:

  1. Go to Table 1.1.6, Real Gross Domestic Product, Chained Dollars, at the BEA website.
  2. Divide the annualized rate for Q4 2015 ($16.4706 trillion) by the Q3 2015 annualized rate ($16.414 trillion). You should get 1.0034.
  3. Raise this to the power of 4. (There's a function called POWER that does that in Excel). You should get 1.0139.
  4. Subtract one. You should get .0139.
  5. Convert to a percentage by multiplying times 100. You should get 1.3865, or 1.4% when it's rounded to one decimal place.

That is the same as the BEA's final estimate for GDP growth for that quarter. (Source: BEA Why Does the BEA Present Quarterly Series at an Annual Rate?

GDP Frequently Asked Questions

Continue Reading...