Question: What Is the GDP Growth Rate?
Answer: 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 another driver of growth, and is 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. This, in turn, can easily further depress the economy and consumers have less money to spend on purchases. If the GDP growth rate actually turns negative, then the country's economy is heading towards or is already in a recession. That's when the economy actually contracts, and GDP is less than the quarter or year before. This occurs during the four phases of the business cycle.
This 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, it is annualized so it can be compared to the previous year. This means that, in any given quarter, the BEA reports what GDP is for the year. This takes out 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. This can impact the stock market as investors get this new information about the state of the economy's health. To see how the GDP growth rate has been changed, 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 2012 :
- Go to Table 1.1.6, Real Gross Domestic Product, Chained Dollars, at the BEA web site.
- Divide the annualized rate for Q4 ($13.6654 trillion) by the Q3 annualized rate ($13.6525 trillion). You should get 1.0000944882.
- Raise this to the power of 4. You should get 1.0037848.
- Subtract one. You should get .0037848.
- Convert to percentage. You should get .4%