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COMMERCIAL PRINTING Outlook -- Shadows Cast on 2006

December 2005

Technology Editor

Printing industry sales may no longer track exactly with GDP, but the two remain inextricably linked. Unfortunately, recent events have greatly increased the difficulty in trying to forecast the economy's track in 2006 with any degree of confidence.

In the fall, the National Association for Printing Leadership's (NAPL) economic team revised downward both its printing industry forecast for 2005 and projection for 2006, reports Andrew D. Paparozzi, chief economist. Growing concern about the economy and ongoing resistance to price increases in the marketplace were the main reasons.

"In an industry as competitive as ours, it doesn't take a recession to cause a problem," Paparozzi says. "Just a slowing from the kind of economic pace we've seen over the last two years becomes an issue for print sales."

The U.S. economy grew by 4.1 percent in 2004 and now is on track to grow somewhere around 3.4 or 3.5 percent in 2005, the economist believes. If GDP growth even just slows to between 2 and 2.5 percent in 2006, printers will feel an impact, he contends.

Lack of pricing power is a key part of the equation. Printers are finding it difficult to pass along rising costs—including direct costs such as ink, transportation and paper—much less boost their margins.

"Particularly starting in the second half of 2005, our tracking shows printers have been able to push some of the cost increases through," Paparozzi says. "They've been able to raise prices more than they have in a long time, but not enough to protect profit margins given their broadly rising costs.

"In fact, the results from our '2006 State of the Industry' survey show the top concerns heading into 2006 are (in ranked order) rising energy prices, rising wages and benefits—particularly benefits—and the economy," he adds.

As for print sales, NAPL now expects industry revenues to grow between 2.5 and 3.5 percent in 2005. That figure will probably gravitate toward 3 or 3.2 percent by the end of the year because of what gains there have been in pricing power, he adds. "Next year we're looking more at growth in the 1.5 to 2.5 percent range, maybe 2 to 3 percent if market trends are on the more positive side."

Yield Signs Ahead

With the qualifier that NAPL is not in the business of forecasting the overall economy, its chief economist says the variables that could impact economic performance are weighted toward slower growth.

"We use the 'Blue Chip Economic Indicators' consensus forecast, which is still 3.3 percent for 2006. It's easier to make a case that growth will be lower than that figure, rather than higher," Paparozzi says.

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