Merrill Lynch: Per Capita Recession Began in Q4

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 phenomena 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

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 left-hand 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

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What's been said:

Discussions found on the web:
  1. Dee Leverage commented on Apr 3

    That’s nothing…if you use a realistic inflation number, we have been in a deep recesion since early 2000!!!!

    Shadow Stats

  2. Egg commented on Apr 3

    I find these statistics confusing for the following reason. Isn’t it common knowledge that the standard of living has been declining in America for decades now? One-earner households become two-earner households, people have less free time to relax, recuperate from work and think about how to manage their lives, now we even have an epidemic of sleep deprivation. Our culture of saving has become a culture of borrowing–even before the recent era of excess people turned to borrowing to pay for necessities. Yet once upon a time it was not so.

    In this case I’ll just point out that “per capita” is the same as “average” which is clearly the wrong way to measure this sort of thing. Use quantiles and I think my previous paragraph would also be supported by the statistics.

  3. Richard commented on Apr 3

    GDP, per capita or not is a terrible measure of living standard.

  4. Peter commented on Apr 3

    Putting the UK at the top of the list is flattering the UK when it shouldn’t.

    More than any other country, the UKs recent growth has come from the financial sector and therefore the GDP will decline more severely as the financial issues work their way through the system.

    Indeed, the balance of payments decreased significantly in February, but that has been attributed to less money flowing out of the banks in the city of London.

  5. joebedk commented on Apr 3

    You have to wonder though whether US population growth is continuing. With much of the immigrant population absorbed in the construction industry, it certainly seems possible that net immigration will be negative over the next decade or so. Since the immigrant population is largely responsible for higher birthrates, it seems too that US birthrates are likely to fall substantially.

  6. E commented on Apr 3

    joebedk beat me to it. We cannot assume that population growth has been steady, when so much of it is “off balance sheet”, due to illegal immigration.

    I don’t know where the stats are, but I’d bet that that the illegal portion of immigration to this country went net negative last year.

  7. Fred commented on Apr 3

    Strictly focusing on the macro, per capita is a good step towards equalizing comparisons between different economies. One of my contentions is that China will never advance on a per capita basis – they simply produce too many bodies. Granted wealth will continue to be created but the simple view that the number of bodies that participate in an economy matters tremendously.

  8. wunsacon commented on Apr 3

    >> One of my contentions is that China will never advance on a per capita basis – they simply produce too many bodies.

    Fred, China’s GDP has been growing about 10% a year for several years. Their population has not. So, per capita, they’ve been on a roll.

  9. Greg0658 commented on Apr 3

    Fred says – the number of bodies that participate in an economy matters tremendously

    everybody has to eat and buy toothpaste or see the dentist
    uneducated its crime or packing trucks and then dentists become sparse

  10. DonKei commented on Apr 3

    First, China’s population is not growing, but is rather rapidly aging, much like Japan’s. The difference is that China still has about 400 million in the countryside engaging in subsistence agriculture, whose turn to an industrialized modern economy can still fuel aggregate and per capita growth for decades.

    The United States is growing, but only by immigration. The birth rate for whites (still about 80% of the population) is barely above replacement, at about 2.2 births per white female.

    Per capita GDP should always be the metric for evaluating whether an economy and its people are getting wealthier or not. Japan is, albeit slowly. The US is not, and really hasn’t been for some time. Real wages in the US have been more or less stagnant for nearly 40 years, w/ a slight blip up in the 90’s.

    None of this is news, except to headline writers that don’t understand that economic growth comes from one of two places–population growth, or improvements in the productive use of available resources, and particularly labor.

  11. Michael Donnelly commented on Apr 3

    Barry don’t know if you get it, but you should look into it. David and his staff crank out DAILY economic commentary for high end clients and institutional investors. It is hands down the best I’ve ever seen. I started getting it years ago when I worked for J&W Seligman, by the way Paul Wick of Seligman’s Technology group is a smart guy.

    It is amazing the BIG PICTURE comes really close to ML’s research and I’m guessing your staff is a lot smaller than David’s.

  12. Peter_BK commented on Apr 3

    For millennia the basic unit of work has been the man hour. Thus to grow as a nation populations needed to increase. With technology and increased efficiency, manual labor is becoming more and more obsolete. If you add factors like resource consumption, and waste creation it seems to me that the more efficient approach to raising living standards on a national level for developed countries lies in reducing population levels to a more sustainable level while increasing efficiency. The basic capitalist/growth model has been taken as gospel for 400 years, and it may be time to rethink its basic premises at this point.

  13. David commented on Apr 3

    Better off than 4 years ago? Nope. I was making 50% less money, but supported really a similar standard of living. Of course we added a kid in the past 4 years, so on a per capita basis, we’re right where we were 4 years ago on an income basis. OH well. There’s a reason it’s called the rat race.

    At least my asset base has more than doubled in that time.

  14. semar commented on Apr 3

    should I point out that the GDP growth was 0.6% annualized???
    The nominal growth for Q4 was 0.2%!!!

  15. XON commented on Apr 3

    I find the ratio between the dark blue line and the light blue line to be very interesting. Japans are almost equal, and if I’m not being too unsophisticated about this, that would seem to imply that after the troubles there, that the overall wealth of the country pretty much is held, per capita, by the population.

    On the other hand, the US lines are the most un-equal on the chart, and the whole discussion of the economy centers around the fact that the Government is stealing trillions of dollars and giving it to a few incorporated individuals, who end up owning a huge chunk of the GDP. In other words, the difference between dark blue line and light blue line represents the amount not owned by individuals. (Take whatever political point from that you wish. . .)

    I wonder what the two lines would have looked like for Warsaw Pact countries?

  16. TempusFugit commented on Apr 3

    “Isn’t it common knowledge that the standard of living has been declining in America for decades now?”

    No. Measured on many dimensions — longevity, infant mortality, literacy, teenage pregnancy, crime rates, housing stock, college attendance, real apparel prices, real technology prices, real auto prices, etc. — we are MUCH better off than decades ago.

  17. Francois commented on Apr 3

    “Are you better off today than you were 4 (or 8) years ago?”

    Well well! Maybe the quibble on GDP stems from the fact that no one in the Bush Administration wants to ask publicly this question.

  18. rickrude commented on Apr 3

    we need more rich chinese imigrants to boost up the GDP nmubers

  19. The American Mind commented on May 29

    No Recession Still; UPDATE: Maybe Per Capita

    If you define a recession as negative economic growth for two straight quarters then the U.S. has yet to see one this business cycle. The revised numbers from the Commerce Department (PDF) show GDP growth was better than first reports:
    The revised read…

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