A healthy gross domestic product (GDP) growth rate sustains the economy in the expansion phase of the business cycle for as long as possible. GDP is the total market value of the goods and services produced within a country in a year.
The GDP growth rate is how much more the economy produced than in the previous quarter.
- The ideal GDP growth rate is between 2% and 3%.
- The GDP growth rate was -0.9% for the second quarter of 2022, which means the economy shrank by that much between April and June.
- The GDP growth rate measures how healthy the economy is. When the number is positive, the economy is growing. When the number is negative, the economy is contracting.
A Healthy Rate of Growth Is 2% to 3%
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.
If the economy grows too slowly or even contracts, it's not healthy. On the other hand, if it grows too rapidly, that's not ideal either.
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 toilet paper 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, the nation's central bank, uses monetary policy to influence inflation and economic activity.
The Fed raises the federal funds rate target range to raise interest rates if the economy expands too fast and lowers it if it's contracting. It also increases or reduces the supply of money to help adjust growth. Using these 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
Despite the ongoing pandemic, the economy grew at the fastest rate since 1984 in Q4 2021; GDP grew by 6.9%. 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.
Once a bubble bursts, the economy enters the contraction phase of the business cycle.
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 2019. 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.
Is the Current Economy Healthy?
Despite two consecutive quarters of negative GDP growth, opinion is split on whether or not the U.S. economy is currently in a recession. Some point to historically low unemployment rates as an indicator that the economy is still healthy, while others say the negative GDP is an indicator that the U.S. economy is spiraling into a recession. The National Bureau of Economic Research (NBER) has yet to label it a recession.
The COVID-19 pandemic and subsequent recession in 2020 caused GDP to contract by -31.2% in the second quarter of 2020, worse than any year during the Great Depression. The National Bureau of Economic Research (NBER) labeled it a recession. As such, it is the shortest ever recorded. The NBER also announced the recession officially over in April 2020.
GDP growth is one of the most used metrics by economists to decide whether a country is operating healthily or not, 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 gross national product.
Here are the quarterly growth rates for 2021 and the previous five years:
|Q1||6.3%||Recovery continues, Delta variant spreads|
|Q2||6.7%||GDP continues to rise, Delta variant spreads|
|Q3||2.3%||Decelerated due to decrease in consumer spending|
|Q4||6.9%||Recovery continues despite Omicron variant|
2020 GDP Growth Rates
|Q1||-5.1%||The government shut down the economy in March|
|Q3||33.8%||Recovery began as businesses reopened|
|Q4||4.5%||Recovery slowed as COVID-19 infections increased and some businesses closed again|
2019 GDP Growth Rates
|Q1||2.4%||Exports rose while imports fell|
|Q3||2.8%||Commercial equipment fell|
|Q4||1.9%||Business spending fell|
2018 GDP Growth Rates
|Q1||3.1%||Boost in commercial construction|
|Q2||3.4%||Shippers accelerated exports to avoid a trade war|
|Q3||1.9%||Exports fell due to trade war|
|Q4||0.9%||Consumer spending slowed|
2017 GDP Growth Rates
|Q1||1.9%||Government spending fell|
|Q2||2.3%||Modest consumer spending|
|Q3||2.9%||Strong spending on durable goods|
|Q4||3.8%||Continued durable goods spending|
2016 GDP Growth Rates
|Q1||2.4%||Stock market fell, reducing business investment|
|Q2||1.2%||Home construction slowed|
|Q3||2.4%||Auto sales, commercial construction grew|
|Q4||2.0%||Consumer spending not enough to offset slowing exports|
Frequently Asked Questions (FAQs)
What does "GDP" mean?
GDP, or "gross domestic product," measures the total value of everything that's produced within a country's borders. It's one of the most important metrics for a country's productivity level.
Why is GDP growth important?
Because GDP measures an economy's productivity level, it's generally important to see growth in that productivity metric. An economy does have natural lulls and downturns, but over the long haul, a growing GDP means more money is flowing into the economy, more jobs are available, and employment is increasing. These are all critical signs of economic health.
How does a country increase its GDP?
When a country has an abundance of the factors of production—land, labor, capital, and entrepreneurship—it's more naturally able to leverage those to produce economic growth. However, the government and central bank can also spur growth through by spending more, lowering taxes, or lowering interest rates.
Bureau of Economic Analysis. "Gross Domestic Product, Second Quarter 2022 (Advance Estimate)."
Stanford University. "The Facts of Economic Growth," Page 3.
Bureau of Economic Analysis. “National Income and Product Accounts Tables: Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product." Quarterly, 1996-1999.
Board of Governors of the Federal Reserve System. "What Economic Goals Does the Federal Reserve Seek to Achieve Through Its Monetary Policy?"
Bureau of Economic Analysis. "Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product." Annually, 1999-2021.
Organisation for Economic Co-operation and Development. "Inflation (CPI)."
Board of Governors of the Federal Reserve. "Federal Reserve Issues FOMC Statement of Longer-Run Goals and Policy Strategy."
Wharton School of the University of Pennsylvania. "The Real Causes — and Casualties — of the Housing Crisis."
Bureau of Economic Analysis. "Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product." Quarterly, 2016-2022.
National Bureau of Economic Research. "Determination of the April 2020 Trough in US Economic Activity."