Commercial Printing Outlook — Tepid Vote of Confidence

BLOODY MARY, Bloody Mary, Blood. . .Wait, does the curse still hold if one simply writes her name three times?

Economists seem to have developed their own urban legend about the “R” word. There’s a fear that simply saying the word “recession” out loud will be enough to cause one to happen.

In a sense, though, that may be true. Consumer spending has been a big part of what’s kept the United States economy going as well as it has been. How people feel about their personal situations today and their prospects in the near term—or consumer confidence—has a strong bearing on their willingness to spend and incur debt. If consumers hear enough discouraging news and warnings about the potential for a recession, it could become a self-fulfilling prophecy.

So far, the consensus outlook sees the U.S. avoiding the “R” word (best to play it safe). There are enough business and geopolitical conditions still in play, though, to keep that a definite possibility.

Since the printing industry still tracks with the direction of the general economy, the outlook calls for slower sales growth in 2008. Slow is better than no growth, so the real cause for concern may be the trend in profits. Printers continue to bear cost increases they have difficulty passing through to clients.

Despite the challenges, total printing industry sales should finish up around 2.5 percent (maybe slightly higher or lower) in 2007, says Andrew Paparozzi, vice president and chief economist for the National Association for Printing Leadership (NAPL). “We’re looking for 1.5 percent to 2.5 percent sales growth in 2008.”

There may be a greater likelihood of industry sales trending toward the lower half of that range—1.5 to 2 percent, the printing industry economist continues. The broader economic outlook is the reason to be bearish.

“The economy, although likely to avoid recession, has clearly slowed and is feeling the effects of all the things in the headlines,” Paparozzi explains. Chief among these are the excesses in the mortgage markets that have created difficulties in the financial and housing sectors. Then there’s rising gas prices, consumers feeling insecure about the future and continued unrest in spots around the globe.

“With that kind of head wind, it’s hard to imagine the economy is going to be much help next year,” the economist says. As of October, Blue Chip Economic Indicators was projecting 2 percent growth in GDP for 2007 and 2.4 percent in 2008, he notes. That’s down significantly from the corresponding 3 percent and 2.8 percent projections it released in February of this year.

Better than Forecasted

Ronnie H. Davis, Ph.D. and PIA/ GATF’s chief economist, has been surprised by the strength of the economy in 2007. “The ‘official’ PIA/GATF forecast called for a bit of slowdown to about 1.5 to 2 percent growth in the economy and 2 percent growth in nominal printing shipments this year. We’re probably going to end up at over 2.5 percent growth in the economy and around 2.5 or 3 percent growth in print markets,” he reports.

PIA/GATF does not adjust its industry sales growth figures for inflation, in contrast to NAPL, in order to talk in the same terms as printers typically think about their own sales, notes Davis. “There probably is about a percentage point of inflation in those numbers.”

Economic growth slowed considerably in the first quarter of 2007, but then picked up a little faster than Davis anticipated. “If the economy grows at 2.5 to 2.7 percent (as he expects) in 2008, print markets should grow at around 3 percent.”

Surprisingly strong export numbers have helped buoy the economy, but consumers remain the key to avoiding a recession, NAPL’s Paparozzi asserts. Along with exports, other positives, he says, include the fact that employment is still growing (albeit at a slower rate) and the consumer has been remarkably steady. “That’s why most business analysts, including NAPL, don’t expect a full-fledge recession. All it would take is a significant shock to consumer confidence, though.”

Davis also points to exports as “having saved the economy” in 2007, but he expects that boom to slow in 2008. Fortunately, there should be a counterbalancing positive force as the country starts climbing out of the housing depression sometime next year, he adds.

Strength in the global economy and weakness in dollar exchange rates boosted exports. “It used to be that when the U.S. sneezed, the global markets caught a cold,” notes the PIA/GATF economist. “Now, the rest of the global economy can pick up the slack and keep us out of a recession by buying our exports.”

While he has been amazed by how much more stable the U.S. economy has been in recent years, Davis sees the factors that heightened the risk of the economy being knocked off target in 2007—housing market and oil prices—carrying over into 2008 at about the same level. “I think we can walk the line for another year and stay out of recession. Our economy has become more service oriented, less manufacturing based and more global, which evens out the ups and downs.”

Along with being somewhat more bullish in his outlook for the economy, Davis believes that 2008 being a presidential election year will “add some heft”—probably about half a percentage point of growth—to print markets. NAPL’s Paparozzi doesn’t think national elections have the impact on printing sales they once did, however. Davis points to the heavy use of printing in the fundraising efforts of candidates, political parties, political action committees, etc., to support his conclusion.

Cuts to the Bottom Line

Keeping an eye on economic and printing sales trends is all well and good, but profitability has become the truer measure of the industry’s health, according to Paparozzi. A disconnect, or gap, has developed between sales increases (top line growth) and greater profitability (bottom line growth), he explains.

NAPL’s surveys have been consistently finding upward of 60 to 65 percent of its printer panel reporting sales growth. Only around 30 percent of those same printers, though, reported corresponding increases in profitability, and the percentage has been slipping. Rising costs—for employee benefits and consumables—are to blame, since printers are having trouble passing the increases on to customers, Paparozzi explains.

“If you can’t pass cost inflation through to customers, you must offset it by increasing productivity and efficiency or it comes out of your bottom line,” the economist says. “Productivity and efficiency used to be something printers concentrated on during downturns. Now, that effort is just as important during upturns to offset cost increases.”

PIA/GATF’s Ratio Studies show industry profits are still a case of the haves and have nots, Davis adds. In recent years, margins have been creeping back toward their long-run equilibrium of about 3 percent, he notes. Last year, they came in at 2.7 percent.

Profit leaders, those in the top 25 percent, continue to achieve margins in the 8 to 10 percent range regardless of the business challenges, the printing economist adds.

Putting an emphasis on profitability doesn’t mean economic trends become unimportant, clarifies Paparozzi. In fact, he says NAPL began advising printers to keep an eye on the economy starting in late 2006. In order to stay ahead of any shift, the association has been recommending that printers investigate what benchmarks they have internally that might tell them a slowing economy is affecting their clients. Possibilities include the number of requests for quotes received, volume of work on hand and number of sales contacts.

Along with being forewarned, printers should be forearmed, the economist says. “Ask yourself: ‘If business degenerates, where would I be able to cut without jeopardizing my competitiveness?’ We haven’t needed to worry about the economy in recent years. It’s worth thinking about now and spending some time going through this exercise.”

PIA/GATF’s Davis further cautions that, in a downturn, the printing industry sector declines faster than the economy as a whole and is slower to recover. “The next downturn will come, and we’re going to go down hard and take a long time to recover,” he warns.

Seven Year Itch

In this more competitive age of printing, capital investments should always be based on a clear marketing plan and be made with an eye toward cutting costs and improving efficiency, rather than adding capacity, the PIA/GATF economist advises. Printers should be even more cautious in their investment decision-making with the economy entering its seventh year of growth, he adds. “The longer you go in a cycle, the greater the risk becomes of something happening.”

Variable data/digital printing and ancillary services (chiefly mailing and fulfillment) remain the industry bright spots. Based on their respective research, both economists re-port these services continue to grow at multiples of the offset printing growth rate. That finding is backed up by other industry watchers.

In late summer, PRIMIR/NPES released a study of the global print market, titled “The World-Wide Market for Print 2006-2011.” It concluded that digital printing (both electro­photographic and ink-jet) will continue to grow ahead of all other printing sectors through 2011, at which point they’ll have a 21 percent combined market share.

The organization had earlier published a study titled “Benchmarking Non-Print Revenues of (U.S.) Printing Companies.” It projects such services—photography, design, database services, mailing, fulfillment, etc.—to grow from 8 percent of total industry revenues in 2005 to 13 percent by 2010.

Market analysts from Info­Trends shared the research firm’s outlook for digital printing in presentations at Graph Expo. According to Jim Hamilton, the retail value of color digital printing in the U.S. is projected to increase at a 14 percent compound annual growth rate (CAGR) through 2011. Wide-format ink-jet printing will grow at a 4 percent CAGR to total $11.9 billion in 2011, reported Tim Greene.

All of these bets are off, of course, if the economy doesn’t avoid slipping into a recession. PI