Planning for 2019: Economic and Print Market Outlook and Implications for Printers

Transcription

1 Planning for 2019: Economic and Print Market Outlook and Implications for Printers Dr. Ronnie H. Davis, Senior Vice President and Chief Economist Center for Print Economics and Management Sponsored by:

2 Planning for 2019: Economic and Print Market Outlook and Implications for Printers In this Special Flash Report we provide our assessment of current economic and print market conditions plus offer our forecast for the 2019 economy and print markets. Specifically, we address the following topics: An update on current macroeconomic conditions The outlook for the 2019 economy Current print market conditions Printers current business models (print processes, product and service offerings) Outlook for print markets in 2019 Key issues for PIA members in 2019 Update on the 2018 Macroeconomy In general, the North American economy is running in high gear during the third quarter of However, there are some signs of increasing economic stress. First, the good news. At the time of this report (August 2018) most of the economic news is extremely optimistic. The supporting metrics include: Second-quarter GDP increased at a very robust pace of 4.1 percent on an annual basis. Core inflation continues at a low rate, although it is heating up. Consumer and business confidence remain very strong. Business profits are high, driven by strong domestic and global sales plus deregulation and lower corporate taxes. Employment growth and an extremely low unemployment rate have resulted in rising wages. Stock prices and home prices are growing. The 4.1-percent growth rate for the economy reported for the second quarter ranks as the highest mark out of the last ten quarters going back to The current economic expansion started all the way back in June 2009, a phenomenal 110 months of sustained growth. This makes this expansion the second longest in 164 years of record keeping by the National Bureau of Economic Research, the official scorer of the economy. The only other longer expansion, from 1991 to 2001, commenced a discussion about the new normal and an end to the business cycle. The Great Recession of put an end to that conversation! PAGE 2 OF 22

3 From May through July, U.S. employment growth averaged 224,000 jobs per month or about double the pace necessary to absorb growth in the working-age population. The economy has produced 94 consecutive months of steady employment growth. The labor force participation rate is up to 62.9 percent, while the unemployment rate fell to 3.9 percent from June s 4.0 percent, close to a 17-year low. Wages are increasing at a modest pace of 2.7 percent year-over-year. Strong hiring and consistently low unemployment should add upward pressure to wages throughout the remainder of the year. Growing wages, boosted by tax cuts and a tight labor market, should keep consumer confidence elevated throughout The U.S. manufacturing sector is extremely robust. Manufacturers added 37,000 new jobs in July, and the sector has enjoyed a full year of continued strong employment growth with about 327,000 new jobs added in the past 12 months. Tax reform and deregulation combined with sustained growth in global markets are stimulating manufacturing activity and expansion plans. The Consumer Price Index increased at an annual rate of 2.2 percent in June, and core personal consumption excluding food and energy prices rose 1.9 percent from a year ago. PAGE 3 OF 22

4 The good news on employment extends to the manufacturing sector. As the overall unemployment rate has declined, the number of manufacturing jobs has increased by approximately 200,000 since last fall. Source of Graph: National Association of Manufacturers On the downside, is too much good news bad news? It certainly can be in terms of the economy. Here are a few contrarian thoughts: First, over the longer term, the U.S. economy is slowing. The average annual growth rate of inflation-adjusted GDP has generally slowed by decade since the 1950s. Indeed, the decline is more than two percentage points since the 1950s and over one percentage point since the 1970s and 1980s. PAGE 4 OF 22

5 A primary reason for the longer-term decline in growth is that the growth rates achieved during economic expansions have decreased over the decades. This trend is apparent when the 11 expansions are viewed chronologically since There seems to be some correlation between lower-growth expansions and longer-lasting expansions. Since 1949, the economic expansions have not only been generally weaker but the good news is they have been generally longer. As this expansion heats up, does that raise an alarm? PAGE 5 OF 22

6 With this background we can now provide our forecast of the economy in The Economic Outlook for 2019 In our view, the economy will most likely continue on a pace of robust, above-trend growth of around 3 percent in However, as always, economic forecasting is fraught with uncertainty. As usual, we offer two other entirely possible 2019 economic scenarios: A slowing but growing trend line with GDP retreating back to around 2-percent growth A 2019 recession with total GDP down around 1.5 percent Of course, other outcomes are possible, including higher growth or a more serious recession or any hybrid combination of our three scenarios. Our percentage likelihood of our three scenarios is a 50-percent chance for robust growth, 20-percent chance of slowing growth, and 30-percent chance for a recession. Note that we have increased the likelihood of recession from last year s outlook from 25 percent to 30 percent. In our view, the likelihood will increase even more in 2020 if we get by 2019 without one. PAGE 6 OF 22

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8 Let s look at each of these scenarios. Robust Growth: This most likely scenario is a continuation of the recent uptick in economic growth. The two key drivers of this prospect are already in place deregulation and the cut in corporate taxes. These both increase the competitiveness of the U.S. economy and raise the equilibrium annual growth rate by around 0.5 to 1 percent. So far, the economy has been able to accelerate to this pace by an elastic response in labor force participation and a return to more animal spirits in business investment Recession: Historically, most recessions are caused by two primary reasons external shocks such as oil shortages or a financial crisis, or excess exuberance leading to over investment that finally results in cutbacks and downsizing. A variation of the second cause is simply the recovery dying of old age as new investment opportunities decline. A case can be made for either of these arising next year or in External shocks: There are many possible external shocks, but the most likely at the present time is an escalation of trade wars leading to higher tariffs leading to even higher tariffs and finally recession. Excess exuberance: We discussed the possibility of too much of a good thing being a bad thing earlier. The excess exuberance could lead to over investment and ultimately cutbacks leading to more cutbacks. The likelihood of this may be higher given the fact that we are in the second longest recovery in 164 years of tracking the U.S. economy. Over the past few months the yield curve (the spread between short-term and long-term interest rates) has been rotating toward less slope, and this has been a fairly reliable predictor of a coming recession. While the yield curve has shifted, it has not yet flipped, so we likely have some gas left in the economic tank. But, with over 110 months of growth, time may be running out. At the present time the downside risks that could lead to a recession include: 1. Trade restrictions/barriers slow down the U.S. global economy. 2. Labor shortages restrict growth coupled with immigration restrictions (total number, quantity and quality, age). Immigrants substitute or complement to U.S. labor supply? 3. Bottlenecks particularly transportation 4. Costs and price pressures Both are inherent in the growing economy and as a result of possible missteps by the Federal Reserve as it unwinds the bond-buying push of the last few years. PAGE 8 OF 22

9 5. Interest rates ramp-up from inflation, and increases in deficit crowd out private investment. 6. Other wild card issues Slowing but Growing: A slowing but growing economy would be a return to the economic trajectory of the past few years. The likely cause of this path is some combination of the six downside risks listed above. Just two or three of those in combination may not be enough to tip the economy into recession but certainly could shave a full point from the robust growth scenario and leave us with sluggish growth. PAGE 9 OF 22

10 Back to the Present: Current Print Markets Since the end of the Great Recession in June of 2009, print markets have become increasingly healthy. This is particularly true for 2018 as the economy has ramped up. As we have previously pointed out, there are six key reasons why print and printers have largely been healthy since the end of the recession. On a nominal basis, print markets are growing around 1 to 2 percent at the present time. For 2016 (the most current data from the U.S. Census), print s economic footprint totaled $166.3 billion in annual shipments, 42,060 establishments, and over 810,000 employees Print and Publishing Market Overview Commercial Print and Related Support Activities (NAICS 323) NAICS segment Employment Establishments Shipments ($1,000s) Commercial print 338,592 18,405 $61,863, Commercial screen 63,056 5,150 $11,520, Commercial book 19, $3,633, Support activities 24,555 1,545 $4,486, Total 446,089 25,521 $81,504,722.8 Print-Related Media (Publishing) (NAICS 511) Employment Establishments Shipments ($1,000s) Newspaper 180,786 7,496 $22,460, PAGE 10 OF 22

11 Periodical 90,640 5,584 $24,286, Book 64,222 2,574 $25,945, Directory and mailing list 15, $7,491, Greeting card 13, $4,576, Total 364,134 16,539 $84,759,377.1 Commercial Print and Related Support Activities and Print-Related Media (NAICS ) Employment Establishments Shipments ($1,000s) NAICS ,223 42,060 $166,264,100.0 Printers profits are also generally healthy based on historical trends. The most recent metric from PIA s Ratios progam shows profits as a percent of sales at 2.7 percent. What about print production processes? The typical business model for a printer includes using multiple printing processes and providing numerous non-print services. Sheetfed and toner-based digital continue as the most prevalent printing processes with inkjet capabilities gaining popularity. However, web and gravure still are viable processes for specialized printers. Over six out of ten respondents indicated they provide non-print value-added services. In contrast, this suggests that almost four out of ten printers remain fully focused on print production with little or no ancillary services. See the data below from our on-going joint research program with the Jones School of Business of Middle Tennessee State University: PAGE 11 OF 22

12 What is the relationship between sales and print processes? In our recent joint research with the Jones School of Business of Middle Tennessee State University we asked our respondents to provide their perception of sales change related to each of the nine processes they provide. Here s the question we used to measure sales change: For each printing process that you provide, please indicate the extent sales decreased, were flat, or increased from 2016 to now for your company. Please select on a 1 5 point scale: 1) Sales declined drastically; 2) Sales declined modestly; 3) Sales were flat; 4) Sales increased modestly; and, 5) Sales increased dramatically. Based on this scale, digital toner-based print was the fastest growing process followed by production inkjet and non-print ancillary services. In contrast, heatset web was the laggard with sales declining slightly based on the scale. This was the only segment with decreased sales based on the scale. PAGE 12 OF 22

13 Sales Change Web offset heatset Sheetfed Web offset non-heatset Digital inkjet wide & superwide format Flexographic No-print ancillary value added service sales Digital inkjet high-speed production Digital toner-based PAGE 13 OF 22

14 What products are being printed? There is a wide variety and diversity in printed products. When we surveyed printers some 28 specific print products were identified. PAGE 14 OF 22

15 The demand for these products was also quantified in the same metrics as used above for print processes. The ratings generally ranged from stable to modest growth reflecting the generally healthy print markets as discussed above. PAGE 15 OF 22

16 What ancillary services are printers providing? Our research demonstrates that there are twelve fairly common ancillary services currently offered by printers. Of these, fulfillment and mailing management are provided by a majority of printers. PAGE 16 OF 22

17 In terms of demand, ancillary services generally are more in demand than print products according to survey respondents. Indeed, all twelve ancillary services score at least a moderate in terms of increases in demand. PAGE 17 OF 22

18 Back to the Future: Print Outlook for 2019 So how will the three 2018 economic scenarios impact print? In our view: In the most likely robust-growth scenario (50% likelihood), overall print shipments increase by 2-plus percent next year. In terms of industry profitability, the average printer s profit rate would likely increase by about 0.5 percent over trend to around 3.5 percent of sales. The recession scenario (up to 30% likelihood) would reduce total print and print-related shipments by around 2 to 4 percent next year. The typical printer s profits would dip significantly into negative territory until the recovery is underway. The slowing-but-growing scenario (20 % likelihood) would result in stable or slightly growing overall print sales in In this scenario, printers profits dip slightly to around 2.5 percent of sales. PAGE 18 OF 22

19 Printers Profit Outlook: Printers profits will trend by significantly different paths depending on the economic scenarios: In the robust-growth scenario, profits would jump significantly to historic highs of 3.4 percent of sales in 2018 and 3.5 percent of sales in If the economy falls into a recession, in 2018 printers profits would be wiped out and turned into losses for both 2018 and In the trend scenario, profits would remain at 3 percent of sales for both 2018 and PAGE 19 OF 22

20 Of course, within each of these three scenarios profit leaders will do much better and profit challengers much worse. Profit leaders will be profitable in any of the three scenarios, although the level of profits will vary. The largest impact is on the downside with profits dipping substantially in a recession. The trends for profit challengers are not respectable even in good times, and in bad times they are even worse. In the best case, profit challengers will average only around one percent of sales. In contrast, they drop to a negative one percent in a recession. PAGE 20 OF 22

21 Outlook by Print Processes: The current trends regarding print processes will continue in all three economic and print market scenarios. Print processes that will grow relatively fastest over the next one to two years include: Inkjet both wide-format and production Wide-format particularly digital and inkjet Digital toner-based Outlook by Print Market Segments: The current trends for specific print market segments will also likely carry over for the next year in all three scenarios. These print market segments will likely grow at a relatively higher rate than other sectors: Packaging and specialty packaging Labels and wrappers Signage Direct mail Point-of-purchase Key Issues for PIA Members in 2019 Given the above economic and print scenarios, there are two key issues PIA members need to address in the immediate future. One issue is outside the plant and the other issue is inside the plant. 1. Outside the Plant: An increasingly variable and risky economic and industry environment Although we are not forecasting a recession, the likelihood of one is increasing, especially looking out over a two-year horizon. However, at the same time there is a strong chance of robust economic growth. The resulting range in outlooks for printers goes from revenue growth of 2 percent or more to revenue decline of 4 percent or more a significant range. Members need to be prepared for both ends of the spectrum next year. While the risks are high, the rewards are also high. Printers need to do their homework to objectively evaluate investment opportunities to determine the ROI while also developing a what if plan for the downside. 2. Inside the Plant: Increasing need for competitive advantage strategies and tactics to become an industry profit leader Strategic thinking is always important for success but it is even more important in a changing environment. When it comes to strategy in the printing industry, printers first of all should address the dual issues of product/service focus and value-added ancillary services. Financial PAGE 21 OF 22

22 performance typically correlates with specialization by a printed product or vertical market. Also, diversification into various ancillary services also generally correlates with higher profits. This dual strategy works by lowering costs from specialization and increasing revenues from diversification. Printers need to re-think where they are in this process and make new conscious decisions about what they are doing. PAGE 22 OF 22