Same As It Ever Was, or Numbers Lie

The markets in the United States are having a nothing day, as everyone digests conflicting data. While manufacturing appears to be expanding, manufacturing output is falling. Meanwhile, there are fewer jobs and continuing layoffs. Nevertheless, some economists are predicting 4.0% growth in the Gross Domestic Product — a figure Reuters reminds us is “the fastest pace since the height of the boom in 1999.” Furthermore, although there is scant coverage of the fact, they are predicting profits to grow even more than that. Nevertheless, inflation is expected to stay low, that is as long as you don’t include gasoline or insurance rates. In the midst of all this, the Fed is expected to sit on their hands when they meet tomorrow. Nothing to see here, the economy is fine. Right?

Meanwhile, WalMart reports that same store sales growth will be near the top of the estimated range.

Growth is great! It is un-American to say otherwise. However, growth in profits in the long term cannot exceed growth in the GDP. Otherwise the GDP would rise, not just because all those goods were sold, but because they had to be manufactured and shipped. Short term, such hyper-growth is made possible by taking market share away from competitors (which only lasts until competitors change business practices to compete better, or go out of business), having an innovative product (which lasts until everyone who wants one has one), getting into new business segments (either by continuous research and development, or by acquiring other companies, neither is sustainable), or by accounting legerdemain (Enron, Cendant, Worldcom, the list goes on). Similar arguments go towards continual sales growth. One additional and important constraint exists on those “same store sales” that the retail sector is always on about: one business location has finite capacity. You can only cram so many people into a WalMart. You can only make them buy product so fast. You can only put so much merchandise on the shelves. Making the store bigger is expensive and only pushes the problem out a little.

If I sound skeptical about the idea of continued corporate growth in excess of GDP without creating inflation, it’s only because I am.