Merrill Lynch: Per Capita Recession Began in Q4

by: Barry Ritholtz

Merrill Lynch North American Chief Economist David Rosenberg points out a simple but overlooked fact about economic growth: The US population is expanding 1.0 - 1.5% per year. Any GDP growth of less than that means that on a per capita basis, we are contracting.

Hence, the per capita Recession already began in Q4 2007, when GDP was 0.6%:

"We are amazed that everyone quibbles about whether real GDP growth will be fractionally positive or negative this quarter. The population is growing in a 1.0-1.5% band annually, so anything less than that on real GDP means that real per capita income is contracting.

That is the way any country’s standard-of-living is determined. And as we saw in the final 4Q revision, real GDP growth may have stayed at +0.6% at an annual rate, but the domestic segments of the economy – strip out foreign trade – actually declined at a 0.4% annual rate. This is roughly the same modestly negative trend in what is referred to as gross domestic purchases that occurred in the first quarter of recession back in 1Q2001 and 3Q1990."

Rosenberg says this means the domestic economy is already in recession.

A few weeks ago, the Economist noted a similar phenomenon about measuring growth globally: Using a per capita measure reveals the changes in a nation's standard of living. If economic growth is slower than population growth, then the living standards in that country are decreasing.

Using a per capita measure works to the benefit of low population growth nations, while using a gross number looks better for faster growing nations:

"Which economy has enjoyed the best economic performance over the past five years: America's or Japan's? Most people will pick America. The popular perception is that America's vibrant economy was sprinting ahead (albeit fuelled by credit and housing bubbles that have now painfully burst), whereas Japan crawled along at a snail's pace. And it is true that America's average annual real GDP growth of 2.9% was much faster than Japan's 2.1%. However, the single best gauge of economic performance is not growth in GDP, but GDP per person, which is a rough guide to average living standards. It tells a completely different story.

GDP growth figures flatter America's relative performance, because its population is rising much faster, by 1% a year, thanks to immigration and a higher birth rate. In contrast, the number of Japanese citizens has been shrinking since 2005. Once you take account of this, Japan's GDP per head increased at an annual rate of 2.1% in the five years to 2007, slightly faster than America's 1.9% and much better than Germany's 1.4%. In other words, contrary to the popular pessimism about Japan's economy, it has actually enjoyed the biggest gain in average income among the big three rich economies. Among all the G7 economies it ranks second only to Britain (see chart).

Per Capita versus Gross GDP

The Per Capita measure may help to answer the query, "Are you better off today than you were 4 (or 8) years ago?"

Grossly distorted picture?
The Economist, Mar 13th 2008

The Fed: Still Pushing on a String
David Rosenberg
Merrill Lynch, March 28, 2008