Fourth quarter GDP was releasd this morning and it grew at an annualized rate of only 0.6%. During the same time frame, inflation ran at an annualized rate of 2.6%.
By the classic definition of a recession, which is two consecutive quarters of declining GDP, we’re not there yet. But by my more meaningful definition – one that gauges the impact on average Americans, we’re already in a significant recession. By my definition, a recession occurs when GDP doesn’t grow enough to keep pace with inflation and population growth. Since inflation is running at 2.6% and population growth is about 1% per year – a total of 3.6% – then GDP needs to grow by 3.6% for Americans to keep pace. With GDP growth of only 0.6%, Americans have fallen behind by 3.0%. That is, the average American is now 3% worse off than he/she was just a few months ago. That’s pretty significant!
In fact, it’s even worse than that. For all of 2007, GDP grew only 2.2%, 1.4% below the rate needed to keep pace with inflation and population growth. So, by my definition, Americans have been in a recession for at least a year. That’s not surprising since median wages and net worth have been in decline for over three decades.
Stay tuned. This is likely to get worse.