When Growth Isn't Growth

photo by Sandrine Huet

Great Long & Short column in yesterday's WSJ recounting some highlights of economic affairs since 9/11. Nothing earth-shattering, but I thought the idea of looking at trends since 9/11 in the market was noteworthy - it's always helpful no matter what you're doing to take a step back and gather some perspective.

The discussion about corporate profit growth having nowhere to go but down is spot on - 17 quarters of double-digit profit growth combined with an increased number of share buybacks and m&a activity (read: little investment in future profit-generating, productive resources) doesn't paint a bright picture for earnings growth down the road.

Profits (wages) as a share of GDP are abnormally high (low), meaning that companies can easliy absorb increases in costs (energy) without putting a lot of pressure on the overall price level. This is one reason why it feels like the inflation readings should be higher than they are, but it simply hasn't materialized to this point. As the situation unwinds, however, the opposite will not be true - if wages begin to increase their share of GDP at the expense of profits, earnings will begin to disappoint and prices will certainly rise - a double-whammy when combined with a flailing housing market.

The level of earnings/profit growth is a direct result of companies keeping a larger percentage of their profits as opposed to re-investing them - if you decide not to buy a car you'll instantly be $50,000 richer but you'll be poorer in the long-run when you lose your job for not showing up. This is the kind of mentality that the oil industry has been criticized so heavily for (they're robbing us blind and not building new refineries!), but it seems like we're giving many other companies posting monster earnings growth quarter after quarter a free-pass despite their increasing similarity to oil companies' modus operandi.

In the end I think we'll remember that productive resources and innovation drive growth (which requires spending and lower near-term profits) - not simply re-distributing money so that more of it passes through everyone's hands.