Per Capita GDP Contracts in 1st Quarter

Recessions are determined by two consecutive quarters of contraction in the nation’s Gross Domestic Product, or “GDP.”  But what if the GDP grows, but more slowly than the growth in the population?  In that case, your share of the economy has shrunk, as it has for every American, and it’ll feel like a real recession to you.  So that’s how recessions should really be defined – in terms of per capita GDP.

By that measure, the next recession may very well already be underway.  Though GDP grew in the first quarter, though by a paltry 0.5% (as announced yesterday by the Bureau of Economic Analysis), per capita GDP actually contracted by 0.2%, thanks to the population growing at an annual rate of 0.8% in the same time period.

This is the 2nd time in four quarters that per capita GDP declined.  It happened in the same 1st quarter time period last year, falling by 0.2%.  The difference is that last year the economy was already beginning to rebound by the end of the first quarter as we emerged from an extremely harsh winter.  This year, the economy stalled in spite of relatively mild weather and, with the first month of the 2nd quarter already behind us, the economic slowdown appears to be intensifying.

This stagnating of the economy isn’t just a one or two-year phenomenon.  It’s been developing for a long time now.  During the 8-year period beginning with the 1st quarter of 2008 (just before the onset of the “Great Recession”), per capita GDP grew at an annual rate of only 0.5%.  (Check this chart:  Real Per Capita GDP.)  During the 8-year period prior to that (2000-2008), it grew at an annual rate of 1.4%.  And during the 8-year period prior to that (1992-2000), it grew at an annual rate of 3%.  Though the economy continues to grow, albeit ever more slowly, in terms of GDP, per capita GDP has essentially ground to a halt.

This is exactly what the inverse relationship between population density and per capita consumption would predict – that eventually over-crowding would erode per capita consumption to a point where per capita GDP would actually begin to contract.  That’s exactly what we see happening now.  Though we continue to lean as heavily as ever on population growth to stoke the economy, that strategy has begun to backfire. We are all becoming worse off as a result.  It’s time for economists to wake up to the fact that this blatantly-flawed economic strategy is doomed to failure – that population growth has become a drag on the economy.