What Is the Ideal GDP Growth Rate?

Question: What Is the Ideal GDP Growth Rate?

Answer: The ideal GDP growth rate is neither fast enough to cause inflation nor slow enough to causerecession. Most economists agree that the ideal GDP growth rate is in the range of 2-3%. Until 2007, the U.S. economy was within this range:

• The annual rate was 2.5% in 2003.
• 3.9% in 2004.
• 3.2% in 2005.
• 2.8% in 2006.
• 2.0% in 2007.

Annual growth rates can mask a great deal of variability, and potential economic trouble, that is revealed by looking at quarterly GDP growth rates. The annual growth rate for 2006 looks great, but the quarterly show signs of economic weakness in the second half of the year:

• Q1 4.8%
• Q2 2.7%
• Q3 .8%
• Q4 1.5%

. In fact, this was the first warning that the housing boom had hit its peak.

In 2007, it looked like the economy was recovering, until it took a nosedive into negative territory in Q4:

• Q1 .1%
• Q2 4.8%
• Q3 4.8%
• Q4 -.02%

. This was a result of the Subprime Mortgage Crisis and resultant Banking Liquidity Crisis.

GDP FAQ

• What Are the Components of GDP?
• What Is the Difference Between GDP and Growth Rate?
• What Is the Ideal Growth Rate?
• What Is a Recession?
• What Is a Depression?