The GDP growth rate is how much more the economy produced than in the previous quarter.
Why a Healthy Rate of GDP Growth Matters to You
Growth, unemployment, and inflation are in balance in a healthy economy. Most economists agree the ideal GDP growth rate is between 2% and 3%. Many politicians think more growth is always better. A healthy GDP growth rate is like a body temperature of 98.6 degrees. You know you’re sick if your temperature is lower than ideal. You may be near death if it’s too low. A higher temperature can also mean you’re sick. If it’s over 100 degrees, you have a fever. If it’s above 104 degrees for any period, you may be seriously ill. An asset bubble may be forming if GDP growth starts spiking above 4% for several years, as it did between 1996 and 1999. The economy begins to overheat when it grows too fast. An overheating economy is unsustainable because it can’t meet the demands of consumers, businesses, and the government. The natural unemployment rate falls. Prices for everything from paper towels to stocks go up. The economy quickly begins to contract. A recession becomes likely unless action is taken to bring everything back to a slowly increasing growth rate. The Federal Reserve raises the federal funds rate target range to raise interest rates if the economy expands too fast. when the economy is shrinking (or ‘contracting), the Fed lowers the rate. Using this and other monetary policy tools, it tries to keep an inflation rate of 2% over the longer run. This helps to manage GDP growth at the same time. If inflation rises too quickly, consumers spend more because their money will be worth less in the future. The following chart visualizes the difference between a healthy growth rate and rates that are too high or too low. It features quarterly statistics from 1995 to 2021, showing how recessions followed dangerously high growth rates. The exception was the recession in 2020, which was caused by a pandemic.
Historical GDP Growth Rates
During 1999 and 2000, U.S. inflation was between 2.2% and 3.4%. While these rates are ideal according to the Federal Reserve, the Fed didn’t start targeting long-term inflation until 2012. In between the 2001 recession and the 2008 recession, the annual economic growth rate was healthy:
2003: 2.8%2004: 3.9%2005: 3.5%2006: 2.8%2007: 2.0%
Between 2003 and 2005, inflation was between 2.3% and 3.4%. The economy grew 4.5% in the first quarter of 2005 and 5.5% in the first quarter of 2006. An asset bubble began to grow in the housing market by the end of 2006. GDP growth tends to decline and go into negative territory in an economic contraction. This can indicate that the economy is in trouble. If the shrinkage continues for more than two quarters in a row, it indicates a recession might be brewing. During the 2008 recession, GDP growth rates were abysmal. The troubles in housing had spread to the investors in mortgage-backed securities, as the financial crisis infected the rest of the economy:
Q1 2008: -1.6%Q2 2008: 2.3%Q3 2008: -2.1%Q4 2008: -8.5%
The American Recovery and Reinvestment Act (ARRA) spurred the economy back into health in March 2009. The first two quarters of 2009 were still negative before ARRAA began to affect the economy. Growth rates returned to positive territory in the third quarter:
Q1 2009: -4.6%Q2 2009: -0.7%Q3 2009: 1.5%Q4 2009: 4.3%
Growth rates in each quarter of 2010 remained positive, between 2.0% and 3.9%. The economy contracted in the first and third quarters of 2011. High foreclosures from the subprime mortgage crisis were preventing the housing market from recovering.
Can GDP Alone Tell Us If the Economy Is Healthy?
GDP growth is one of the most used metrics economists follow to decide whether a national economy is operating smoothly, but it is only one of the many metrics used to gauge a healthy economy. If only GDP and its growth are considered, then the economy is doing well if they are positive or only negative for a short time. However, economists consider other metrics for a full view of the economy. Some of these are the unemployment rate, consumer price index, the purchasing manager’s index, and others. Here are the quarterly growth rates for 2021 and the previous five years:
