Commercial Printing Outlook : Forecasting a U-turnDecember 2009 By Mark Smith
AS THIS issue was going to press, a revision to the third quarter GDP estimate was released that lowered the quarter's growth rate from 3.5 percent to 2.8 percent. The higher number figured prominently into the forecasts offered by both of the printing industry association economists interviewed for this story. It was seen as cause for optimism because expectations had been for a growth rate below 3 percent.
Significant revisions to economic data certainly are nothing new, but this year come on top of "historic" and "unprecedented" being two words thrown around a lot in discussing the state of the economy and printing industry sales. More- so than ever, the value of forecasts this year is likely to be in the trends and underlying factors they identify rather than any specific numbers given.
In the vernacular of economists, the outlook is for the United States to continue seeing a "U"-shaped recovery from the Great Recession. While the economy has bottomed out and the decline stopped, there will be a wide and slow up-slope to the recovery, such as it is.
"Six or eight months ago no one knew when the free fall was going to stop. Very few people expected the economy to grow in the third quarter of 2009," notes Andrew Paparozzi, NAPL's chief economist and vice president. The strong growth for the quarter provided additional evidence that the absolute worst-case scenario was not going to be realized and showed the economy is indeed healing, he says. "We've put a bottom under it."
The bad news: The latest estimate from the Blue Chip Economic Indicators report still calls for the GDP rate to be down 2.5 percent in 2009, Paparozzi continues. "That is the largest single-year decline in GDP since 1946."
Printing industry sales for 2009 should come in somewhere between -14 percent to -16 percent, more likely closer to -16 percent, adds the chief economist. "That's on top of a 4 percent decline last year. We're looking at a 20.6 percent decrease (in printing sales) from the peak in the second half of 2007 through September 2009."
Reading the Signs
Weeks before the announcement came, the possibility of a downward revision in the third quarter GDP numbers was already being considered by Ron Davis, Ph.D., and Printing Industries of America's (PIA) chief economist and vice president. "Fourth quarter growth may slow down to a little less than 3 percent, but that's really good compared to declining 3 to 4 percent like the economy had been," he notes. "In 2009, we're going to be down 3 to 4 percent again in terms of nominal (not adjusted for inflation) printing shipments."
According to Paparozzi, the Blue Chip Economic Indicators' GDP projection for 2010 was already on an upswing prior to the release of third quarter estimates. "Its consensus projections for 2010 have been trending up for months, from 1.8 percent in April up to 2.5 percent in the latest report."
Too many people believe the end of a recession means everything is going to be OK again, cautions the industry economist. "It simply means that the economy and our industry have stopped contracting. Recoveries can be very vigorous or very feeble, and anything in between. This recovery is likely to be painfully slow at first and not feel much like a recovery until well into 2010."
NAPL's forecast calls for printing industry sales to grow between 2 and 3 percent overall in 2010, largely due to the healing U.S. economy. While there may be some revenue growth in the first half of the year, Paparozzi expects profitability to continue declining until the second half of the year with ongoing pressure on pricing. "Given the competitiveness of the industry, we don't expect to see meaningful recovery until well into the second half of 2010, and even more so into 2011."
PIA's Davis currently pegs the percentage growth in the economy in the high 2s—maybe 2.7 percent—for 2010 and possibly increasing to 3 percent in 2011. "Relatively speaking, that's pretty good. Compared to past recoveries, though, typically in the first one to two years we had growth in the neighborhood of 4 percent," he notes.
"I'm now a little more optimistic than I was about print sales in 2010. They will probably stabilize and we'll see about zero change in nominal printing shipments for the year overall."
Along with a return to economic growth, Davis sees printing sales being buoyed by competitive congressional races next year and a continuation of the hyper-competitive business environment in the retail/catalog market sector. "Before, companies would wait for consumer spending to pick up and then start promoting. Now, it looks like they're doing promotions to try to get sales to pick up," he says.
While the business downturn has been universal, impacting companies of all sizes in all regions and market sectors, the same won't automatically be true for the recovery, Paparozzi warns. As the business outlook improves, companies now need to guard against "recovery complacency," he says. Printing industry recoveries have gone from being inclusive to increasingly more exclusive, meaning they are reserved for companies that really are prepared for what this industry is becoming, the economist asserts.
The place to start is with key people in the organization discussing three questions:
1) What are we doing better today than we did two years ago?
2) What do we expect to be doing better in two years than we are today?
3) How are we becoming more valuable to our clients?
According to Paparozzi, companies have a problem that the recovery is not going to fix if their answer to any of those questions is, "We don't know" or "We can't be bothered with this." Market share is being redistributed from companies that simply print, to ones that can combine print with other media and support services to develop a compelling communication program that makes their clients better for doing business with them.
Along those same lines, PIA's Davis points out that the year-over-year growth rate for individual printers can actually be much better than the industry-wide figure because of plants going out of business. Those companies that do the right things to survive can see their sales grow, even with flat or declining industry sales, as long as the percentage of plants going out of business exceeds the change in sales, he notes.
Leadership is Changing
Being a market leader used to be about doing things you already were doing better and faster, Paparozzi adds. That started to change in the late 1990s with advances in digital communications and other structural changes that have now redefined not just the printing industry, but the American economy as a whole, he says.
NAPL has found that today's market leaders have five critical attributes in common, starting with regularly completing a very advanced and effective business environmental analysis, both of their internal and external environments. This is along the lines of a SWOT—Strengths, Weaknesses, Opportunities and Threats—analysis that looks carefully at where a company stands internally, and in relation to the competition and its clients. Then, the leaders:
• are able to translate that analysis into a company vision and a meaningful business plan;
• have the flexibility and courage to act on that plan;
• communicate the plan and vision effectively both internally and externally; and
• execute it effectively.
"Those skills used to be luxuries in our industry, but are now required to participate fully in a recovery. You don't need just one or two or three of them; you need all five," Paparozzi says.
He notes that one of the most tried-and-true measures of a recovery is the number of initial claims for unemployment insurance. He says there's a misconception that recovery begins with the unemployed, but it really starts with the mindset of the employed.
When the job losses start to slow, as they have been, the mindset of the employed changes from the paralyzing fear that they will be next to go, to a level of comfort that allows them to consider big purchases (entertainment centers, cars, homes, etc.). As consumer spending and demand first stabilize, then inch up, companies stop making cuts and then start to expand hours worked before, finally, beginning to hire.
Davis is already sounding a cautionary tone for the just slightly longer term outlook. "I see it as the country moving into the eye of a hurricane, with relative economic calm for the next couple years, before some of the problems associated with what we've been doing for the past year or so come back to start haunting us. We are going to see very weak U.S. economic growth for the next decade or so after 2012.
"That is when what I call 'economic sclerosis' will set in and hold down the rate of economic growth to 2 to 2.5 percent which, over the longer term, means we are losing a lot of wealth creation," he contends. The increase in debt and bank reserves that should lead to a healthier 2010 and 2011 could bring on tax increases and new regulations that handcuff growth in the future, Davis believes. PI