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 6.4%. That means the U.S. economy expanded by 6.4% in the first quarter of 2021, according to the second estimate of the Bureau of Economic Analysis (BEA).
This increase follows a third quarter increase of 33.4% and a fourth quarter increase of 4.3%. These increases followed a 31.4% downturn in the second quarter of 2020 that was caused by the COVID-19 pandemic and subsequent recession. That Q2 contraction was worse than the one that occurred during the Great Depression.
- The GDP growth rate indicates how quickly the economy is growing or shrinking.
- It is driven by the four components of GDP, the largest being 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.
When the economy is expanding, the GDP growth rate is positive. If it's growing, so will businesses, jobs, and personal income. The ideal growth rate is between 2% and 3%. If it expands much beyond that for too long, it hits the peak. At that point, the bubble bursts, 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.
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 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 first quarter of 2021:
- Go to Table 1.1.6, Real Gross Domestic Product, Chained Dollars, at the BEA website.
- Divide the annualized rate for Q1 2021 ($19.088 trillion) by the Q4 2020 annualized rate ($18.794 trillion). You should get 1.0156.
- Raise this to the power of 4. (There's a function called POWER that does that in Excel). You should get 1.064.
- Subtract one. You should get 0.064.
- Convert to a percentage by multiplying by 100. You should get 6.4, or 6.4%. You should always round to one decimal place.
With this equation, you should get the same rate as the BEA's estimate for GDP growth for that quarter.