What Is the GDP Growth Rate?
Why It's Important and How to Calculate It
The gross domestic product (GDP) growth rate measures how fast components of an economy are growing. Those components can be added together via three methods: final expenditures, value-added in production, or income.
In the final expenditure method, the GDP growth rate has four components. The primary driver of GDP growth is personal consumption, which 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, with its largest categories being Social Security benefits, defense spending, and Medicare benefits. The government often increases this component of spending to jump-start the economy during a recession. Finally, the fourth component is net trade.
- The GDP growth rate indicates how quickly—or slowly—the economy is growing or shrinking.
- It is driven by the four components of GDP, the largest being personal consumption expenditures.
- The Bureau of Economic Analysis (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 price level change as measured by the BEA’s GDP implicit price deflator.
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 in National Income and Product Accounts, Section 1 reports GDP growth rate in both nominal and real terms and both the prior quarter and from the same quarter a year ago. Real GDP adjusts for the influence of price level change with a measure called the GDP implicit price deflator. For the quarterly growth rate, the BEA annualizes it. When quarterly data is reported, it is reported at seasonally adjusted annual rates (“SAAR”).
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 July 20, 2020.
Bureau of Economic Analysis. “National Income and Product Accounts Tables - Table 1.1.1. GDP Growth (First Year 2006)." Accessed July 20, 2020.
Congressional Research Service. "Introduction to U.S. Economy: The Business Cycle and Growth." Accessed July 20, 2020.
Bureau of Economic Analysis. “National Income and Product Accounts Tables - Table 1.1.1. GDP Growth (First Year 2007)." Accessed July 20, 2020.
Bureau of Economic Analysis. “National Income and Product Accounts Tables - Table 1.1.1. GDP Growth (First Year 2001)." Accessed July 20, 2020.
Bureau of Economic Analysis. "Gross Domestic Product - More to Know." Accessed July 20, 2020.
Bureau of Economic Analysis. “How Is Average Annual Growth Calculated?” Accessed July 20, 2020.
Bureau of Economic Analysis. “National Income and Product Accounts Tables - Table 1.1.6. Real GDP, Chained Dollars (Year 2019)." Accessed July 20, 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 July 20, 2020.