What Is the GDP Growth Rate?
Why It's Important and How to Calculate It
The GDP growth rate measures how fast the economy is growing. It does this by comparing one quarter of the country's gross domestic product to the previous quarter. GDP measures the economic output of a nation.
The GDP growth rate is driven by the four components of GDP. The main driver of GDP growth is personal consumption. This includes the critical sector of retail sales. The second component is business investment, including 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 spending to jump-start the economy during a recession. Fourth is net trade.
- The GDP growth rate indicates how fast or slow the economy is growing or shrinking.
- It is driven by the four components of GDP, the largest being personal consumption expenditures.
- The BEA tracks GDP growth rate because this is a vital indicator of economic health.
- When measuring growth the BEA uses real GDP because it adjusts for the effects of inflation.
Below you can see a chart tracking the annual GDP growth rate from 2006 to 2018. Exports add to GDP while imports subtract from it.
Why the GDP Growth Rate Is Important
When the economy is expanding, the GDP growth rate is positive. If it's growing, so will businesses, jobs, and personal income. But if it expands beyond 3%-4%, then it could hit the peak. At that point, the bubble bursts and economic growth stalls.
If it's contracting, 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.
If the GDP growth rate turns negative, then the country's economy is in a recession. 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 turns positive again.
The growth rate turned positive in Q2 2008. It then turned negative again, prompting concerns about a double-dip recession. In the 2001 recession, the growth rate had been negative for only two quarters.
GDP Growth Rate Formula
The Bureau of Economic Analysis 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 retail sales.
The BEA often updates its GDP estimates as new data comes in. Those revisions impact the stock market as investors react to this new information.
The BEA provides a formula for calculating the U.S. GDP growth rate. Here's a step-by-step example for the Fourth Quarter 2019:
- Go to Table 1.1.6, Real Gross Domestic Product, Chained Dollars, at the BEA website.
- Divide the annualized rate for Q4 2019 ($19.222 trillion) by the Q3 2019 annualized rate ($19.121 trillion). You should get 1.0053.
- Raise this to the power of 4. (There's a function called POWER that does that in Excel.) You should get 1.0213.
- Subtract one. You should get 0.0213.
- Convert to a percentage by multiplying by 100. You should get 2.1297, or 2.1% when it's rounded to one decimal place.
You get the same as the BEA's final estimate for GDP growth for that quarter.
Bureau of Economic Analysis. “What Is GDP?," Page 2. Accessed April 2, 2020.
Bureau of Economic Analysis. “National Income and Product Accounts Tables - Table 1.1.1. GDP Growth (First Year 2006)." Accessed April 2, 2020.
Bureau of Economic Analysis. “National Income and Product Accounts Tables - Table 1.1.1. GDP Growth (First Year 2007)." Accessed April 2, 2020.
Bureau of Economic Analysis. “National Income and Product Accounts Tables - Table 1.1.1. GDP Growth (First Year 2001)." Accessed April 2, 2020.
Bureau of Economic Analysis. "Gross Domestic Product - More to Know." Accessed April 2, 2020.
Bureau of Economic Analysis. “How Is Average Annual Growth Calculated?” Accessed April 2, 2020.
Bureau of Economic Analysis. “National Income and Product Accounts Tables - Table 1.1.6. Real GDP, Chained Dollars (Year 2019)." Accessed April 2, 2020.
Bureau of Economic Analysis. "National Income and Product Accounts - Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product." Accessed April 2, 2020.