What the GPD Growth Rate Means for You
The GDP growth rate is an important economic indicator. It reveals which of the four stages of the business cycle the economy is in: peak, contraction, trough, and expansion. These stages point to whether the stock market and personal income are growing and businesses are hiring. The Bureau of Economic Analysis updates its GDP estimates as new data comes in. Those revisions impact the stock market as investors react to this new information.
The Four 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 positive when the economy is expanding. If it’s growing, so will businesses, jobs, and personal income. The ideal growth rate is between 2% and 3%. It hits a peak if it expands beyond that for too long. The bubble bursts at that point, and economic growth stalls. If the economy contracts, businesses typically hold off investing in new purchases. They’ll delay hiring new employees until they are confident that the economy will improve. Those delays further depress the economy. Without jobs, consumers have less money to spend. The country’s economy is in a recession if the GDP growth rate turns negative. A negative rate occurs when GDP is less than that of the previous quarter or year. It will continue to be negative until it hits a trough. That’s the month when 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 fourth quarter of 2021: You should get the same rate as the BEA’s estimate for GDP growth for that quarter with this equation.
