Commercial Printing Outlook -- Build Up in Down Time

SAYING THAT 2008 is ending on an unsettled note may be the mother of all understatements, but it is the most meaningful way to characterize the economic outlook for 2009. And, bad news for the economy is worse news for printing industry sales. As recently as September, the Blue Chip Economic Indicators consensus forecast projected the American economy to grow 1.5 percent in 2009 but, by November, it was calling for the economy to contract by 0.04 percent, according to Andrew Paparozzi, chief economist and vice president of the National Association for Printing Leadership (NAPL).

The public face of the problem is major banks having to be bailed out, people losing their homes and auto industry chief executives calling on Washington, DC, hat in hand. To economists, though, it is the negative trend in traditional economic indicators—such as consumer spending, housing prices and unemployment rates—that tell the tale. “Those numbers have consistently been coming in much weaker than expected,” Paparozzi says.

Is there any sense in rehashing the obvious, that things look bad? One reason is to convey the degree to which things are different this time. Another is to underscore the need for printers to be proactive, rather than just looking to survive until the turnaround comes.

“What we are seeing is, in many ways, unprecedented,” adds NAPL’s chief economist. “No one knows how deep this downturn is going to go, how long it is going to last, or how strong or feeble the recovery will be when it comes.”

While the economy is very weak, the headlines have been “full of economic hyperbole,” points out Ronnie H. Davis, Ph.D, and Printing Industries of America’s (PIA) chief economist. Making comparisons to the Great Depression solely on the basis of big declines in the stock market gives the impression that other measures of economic health are equally bad, he explains. However, the numbers for real GDP (gross domestic product), personal consumption, industrial production, unemployment and inflation have all remained several magnitudes more positive in 2008 compared to the period from 1929 to 1934.

Hitting a Moving Target

Both industry economists were again looking at revising their economic and industry sales forecasts heading into December. Davis says that a complicating factor for the industry outlook is that printing sales lead the economy when it is in decline and lag in a recovery.

NAPL has been calling for industry sales to come in at around -2 percent in 2008, with the decline continuing through 2009 at somewhere between -1 and -3 percent. Paparozzi now believes sales are more likely to fall into the lower end of that range.

PIA’s approach is to present three scenarios for its yearly outlook. The “most likely” scenario had been calling for two consecutive quarters (Q4 2008-Q1 2009) of negative GDP change, followed by a sluggish recovery that results in a decline in print shipments of -0.5 to -1 percent. Sales would increase 1.5 percent in the “optimistic” scenario (one negative quarter and a quick recovery) or drop in the range of -4 to -5 percent in the “pessimistic” outlook (three quarters of more significant GDP change). Davis’ latest, slightly more positive, revision was still pending.

One of the factors contributing to the uncertainty is the reality of the global economy. This is not a new development, but the worldwide fallout of the financial crisis provided striking evidence of the depths to which the fortunes of countries have become intertwined.

Another big unknown has been how long repercussions of the mortgage crisis will continue to reverberate through the U.S. economy. The widely cited statistic is that consumer spending accounts for 70 percent of GDP and, in recent years, much of that spending has been enabled by growing household debt—via ballooning credit card balances and mortgage refinancing.

“You have to remember that it took us 10 years to get here. We had an expansion built on easy, cheap credit, and that’s now being corrected,” Paparozzi points out.

The household and business sectors of the economy are both now in a “de-leveraging” process that may just be in the early stages, he says. “We’ve got a whole lot more work to do to get our (national) balance sheet back in order.”

Consumer spending is also being hit by a significant rise in unemployment and fears of future job cuts, notes the NAPL economist. It’s about more than cutting costs, since tight credit means companies need cash, and thinning their labor force is a quick way to conserve what cash they do have on hand.

Government actions are a third key unknown. Not only must the transition to President-elect Barack Obama’s administration be factored into the 2009 outlook, but significant revisions were already being made to measures put in place by the current office holders. The ink on the $700 billion “Emergency Economic Stabilization Act of 2008” barely had time to dry before Treasury Secretary Henry Paulson announced a major change in how the money would be used.

A Few ‘Capitol’ Ideas

Lisbeth Lyons, vice president of Government Affairs at PIA, recently put together a list of what the association sees as the top legislative priorities for the 111th Congress. The member alert identified five key areas in which PIA is targeting action:

1) Printers’ foremost legislative concern continues to be the increasingly high cost of healthcare. PIA supports legislation that provides employees greater benefits choices and employers increased flexibility, and will push for measures that increase competition and options in the health insurance market.

2) In the area of labor policy, the greatest concern for printers is the Employee Free Choice Act, also known as card check legislation. This misnamed act would replace secret ballot union organizing elections with an open-petition system.

3) Tax policy could see a major overhaul in the next Congress. PIA will press for repeal or reform of the estate tax, a low capital gains tax and a reformed Alternative Minimum Tax.

4) The environmental lobby has continued its push for restrictions on direct mail through their call for “Do Not Mail” legislation at the state and federal level. The printing industries will continue working with the Mail Moves America coalition to show the value of mail to the economy—and the industry’s dedication to sustainable practices.

5) The environmental and energy policy of greatest concern to printers in the next two years will be the high cost of energy. PIA is very concerned about how climate change legislation could affect regulations and the cost of energy.

NAPL’s Paparozzi believes economists should remain neutral and is hesitant about even giving the appearance of making a political statement in an economic forecast. He does commend both the incoming and outgoing administrations for the degree of cooperation they have shown, and finds it encouraging.

“What’s important in economic policy is certainty and clarity,” the economist explains. He was pleased by the number and tone of the press conferences President-Elect Obama held early on and believes the focus will remain on getting the economy healthy again.

What was missing and would be most helpful is a statement that any tax increases are “on hold” for now, Paparozzi believes. He expects other policies that increase spending to also be tabled until the economy can support them.

Note: This story’s headline was intentionally written to be readable in two ways. Printers who simply try to hold out for an economic turnaround risk not only seeing their volumes decline with GDP, but likely will be at a greater competitive disadvantage when the overall business climate improves. Both industry economists say their research shows that the disparity between industry leaders and the rest of the market is amplified by economic downturns.

In the period from 2000 to 2008, NAPL’s measure of industry sales shows that the group it defines as “leaders” enjoyed a cumulative growth in sales of 71.6 percent, compared to 8.2 percent for the rest of industry companies. The gap started to widen at the beginning of the 2001-2003 recession and greatly accelerated with the rebound.

PIA tracks “leaders” and “challengers” in terms of their profits. Davis says the association found that the challengers experienced three years of losses from 2002-2004 (-1.3, -0.7 and -0.7 percent, respectively), whereas the leaders continued to grow their sales at enviable rates—8.0, 8.4 and 8.7 percent. Those rates were down from the 10.5 percent increase in 2001.

So, how can a printing company come out of this economic downturn as a stronger competitor? Realistically, it just means doing the same things that a well-run organization does day in and day out—look for ways to become more productive and efficient, control costs and prove your value to clients. (Printing Impressions’ January issue will explore the topic in greater depth with advice from leading industry pundits.) Here’s a few quick suggestions to kick things off:

• Maximize personnel resources.Communicate regularly with employees to keep morale up, invest in training and encourage them to explore process improvements.

• Tackle projects that may have been put off in the crunch to get work out the door. It’s not uncommon for the full capabilities of an MIS software suite to go untapped, for example.

• Be a resource in helping clients make the most of their print budget and reinforce the value of print as a medium. Print in the Mix (www.printinthemix.rit.edu) is a clearinghouse of research on print media effectiveness.

• Make strategic investments, when possible, to improve production. Software has lower capital costs, and the industry is still lagging in its process automation efforts. PI