LESSON 1 / 4 · 7 MIN
GDP: three ways to measure growth
Tell apart quarterly annualised growth, growth over a year and the gap to potential.
The headline you hear on the news — 'the economy grew 3%' — is usually quarterly growth annualised: what the economy would grow in a year if it kept that quarter's pace. It is the number that moves markets and the noisiest one.
| Measure | What it answers | Weakness |
|---|---|---|
| Quarterly, annualised | How fast is it growing right now? | Noisy; one quarter can be distorted by imports or inventories |
| Over a year | How much bigger is it than a year ago? | Slow to turn |
| Versus potential (CBO) | Is it producing above or below what it can without overheating? | Potential is an estimate |
The GDP tab looks at the three plus real GDP per person and household spending, and averages them. A single weak quarter is not enough: it takes three of five indicators in red at the same time to cap the grade at 4.
Common mistake
GDP arrives a quarter late and is revised for years. It does not anticipate recessions — it confirms them. Treat it as the slowest tab of all.
Tip
A GDP far above potential is not counted as a problem in this tab. An overheating economy shows up as inflation, and that is measured in Prices. Each tab answers one question.
On the site · /fred/gdp
Open GDP. Compare quarterly growth with growth over a year: when they diverge a lot, the latest quarter is probably noise.
Open it on the site →Check yourself
GDP grows 0.2% annualised in one quarter. The tab stays at 7. Is that a mistake?