February 218 Economic Report
Table of Contents Economic Overview... 1 Terminology & Methodology.. 2 Business Cycle... 3 US Paper & Paper Products Production Index.... 4 US Pulp, Paper, & Board Mills Production Index...... US Commercial Printing Production Index....... 6 US Paper Bags & Treated Paper Products Production Index.... 7 US Periodical, Book, and Other Publishers Production Index... 8 US Media Spending on Print Advertising...... 9 US Durable Goods New Orders (without Aircraft)...... 1 US Paper Producer Price Index.. 11 Leading Indicators..... 12 Appendix.. 13 Management Objectives. 14 218 ITR Economics - 63.796.2 - www.itreconomics.com - All Rights Reserved
overview The US economy is surging forward at the start of 218. US Gross Domestic Product (GDP) ended the fourth quarter of 217 2.% above the previous year. US Industrial Production was up 1.8% year over year in December, with the quarterly growth rate bumping up to 3.4% compared to the final quarter of 216. Rise in the US Leading Indicator through December suggests that the US macroeconomy will keep this momentum through at least the first half of the year. Though we can expect a strong macroeconomy in the coming one to two quarters, beware of linear budgeting for 218; the US Purchasing Managers Index, which typically leads US Industrial Production by 12 months, transitioned to a declining trend in August and signals slowing growth in the latter half of the year. Avoid committing yourself to long-term expenses at the top of the business cycle and look for unprofitable segments of the business to eliminate before the back side of the business cycle sets in. Rise in the US Utilities, Manufacturing, and Mining sectors is supporting upward momentum in US Industrial Production. Global demand and commodity prices will be decelerating in growth in the latter half of the year; focus on strengthening your competitive advantages and customer loyalty throughout this time. US Industrial Production Index Trend 12 11 11 1 1 9 9 8 8 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21 months through December was up 1.8% from the year-ago level and is rising at an accelerating rate. Increasing Disposable Personal Incomes will allow consumers to spend more money on retail goods. The ITR Consumer Activity Leading Indicator declined in January. This indicator suggests that consumer activity will grow at an accelerating pace into the first quarter of 218 before the pace of rise diminishes in the second half of the year. Focus on increasing employment and equipment efficiencies. Direct The retail sector is benefiting from increasing consumer strength. US your training programs toward developing unskilled new hires as a Total Retail Sales during the 12 months through December were up tightening labor market will make qualified applicants increasingly rare 4.2% from the same period one year ago. A tightening labor market is this year. This will help profit margins as the expected rise during 22 helping to drive up wages. US Disposable Personal Income in the three will not surpass the current level for most of the paper industry segments. ITR Economics 1 February 218 12 11 11 1 1 9 9 8 8
Terminology & Methodology Data Trends: Monthly Moving Total (MMT) vs Monthly Moving Average (MMA): Averages are used in cases where the data cannot be compounded, such as an index, percent, price level, or interest rates. Totals are used for cases where it makes sense to add the data together such as units sold or total dollars spent. 3MMT/A and 12MMT/A: A 3-month or 12-month moving total/average is the total/average of the monthly data for the most recent 3 and 12 months, respectively. The 3MMT/A illustrates the seasonal changes inherent to the data series. The 12MMT/A removes seasonal variation in order to derive the underlying cyclical trend. It is also referred to as the annual total or annual average. Rates-of-Change: A rate-of-change figure is the ratio comparing a data series during a specified time period to the same period one year ago. Rates-of-change are expressed in terms of the annual percent change in an MMT or MMA, 3MMT/A, and actual monthly data. Rates-of-change reveal whether activity levels are rising or falling compared to last year. A rate-of-change trend illustrates and measures cyclical change and trends in the data. ITR Economics three commonly used rates-of-change are the 1/12, 3/12, and 12/12, which represent the year-over-year percent change of a single month, 3MMT/A, and 12MMT/A (respectively). A rate-of-change above zero indicates the data is higher than one year prior, while a rate-of-change below zero indicates the data is below one year prior. Accelerating Growth (B): 12/12 is rising and is above zero; the data trend is accelerating in its ascent and is above the year-ago level. This is the second positive phase of the business cycle. Business Cycle: The data trends and rates-of-change identify positions in the business cycle. Those positions are: Slowing Growth (C): 12/12 is declining but remains above zero; the data trend ascent is slowing or has stopped its rise, but it is still above the year-ago level. This is the first negative phase of the business cycle. Recovery (A): 12/12 is rising but is below zero; the data trend is below the year-ago level and is either heading toward a low or is in the early stages of rise. This is the first positive phase of the business cycle. Above year-ago level Below year-ago level 218 ITR Economics - 63.796.2 - www.itreconomics.com - All Rights Reserved Recession (D): 12/12 is declining and is below zero; the data trend is below the year-ago level and the rate of decline is increasing. This is the second and final negative phase of the business cycle. ITR Economics 2 February 218
Business Cycle Industry Phase Current 218 219 22 US Paper & Paper Products Production Index D -.4% -2.3% -2.1% 1.6% US Pulp, Paper, & Board Mills Production Index D -.7% -1.1% -1.8%.8% US Commercial Printing Production Index D.% -1.% -1.4% -.9% US Paper Bags & Treated Paper Products Production Index D -6.2% -7.7% -2.3% -1.7% US Periodical, Book, and Other Publishers Production Index A -3.4% -3.1% -9.1% -2.6% US Media Spending on Print Advertising D -11.9% -8.2% -11.3% -9.8% US Durable Goods New Orders (without Aircraft) B.2% 4.6% -.4% 7.4% US Paper Producer Price Index B.8% -.1%.1% 2.1% ITR Economics 3 February 218
Market Segments US Paper & Paper Products Production Index Annual Trend: 9.4 Phase: D Year-over-Year: -.4% 12 12-Month Moving Average 12 1 Year-over-Year Growth Rate 1 11 11 1 1 11 11 1 1 1 1 9 9 - - 9 9 8 8-1 -1 8 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21 8-1 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21-1 Industry Outlook 218: -2.3% 219: -2.1% 22: 1.6% US Paper & Paper Products Production during 217 General decline in the US Paper Capacity Utilization rate reached the lowest level in nearly eight years, down through 217 indicates that the Production decline will.4% compared to 216. This was a transition into a persist through at least the first half of 218. The Phase D, Recession, since the last report. Production is quarterly data for US Exports of Paper and Paperboard is tracking slightly below the forecast range. However, growing at an accelerating pace on a year-over-year leading indicator evidence suggests Production will track basis. If this trend persists, it would present an upside within range in the coming months. The forecast is risk to Production. unchanged. Production will decline into the second half Focus efforts on increasing efficiencies in your work of 219 before a rising trend takes hold through 22. force as the rise expected for Production in 22 will not surpass the current level. ITR Economics 4 February 218
Market US Pulp, Paper, & Board Mills Production Index Segments Annual Trend: 94. Phase: D Year-over-Year: -.7% 12 12-Month Moving Average 12 1 Year-over-Year Growth Rate 1 11 11 1 1 11 11 1 1 1 1 9 9 - - 9 9 8 8-1 -1 8 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21 8-1 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21-1 Industry Outlook 218: -1.1% 219: -1.8% 22:.8% US Pulp, Paper, and Board Mills Production during the 12 months through December was.7% below last year. Production will generally experience data trend decline through 218. US Paper Mills Production, a four-month leading indicator, in the three months through December was.6% below last year. Contraction signals ongoing decline for US Pulp, Paper, and Board Mills Production through at least the next one to two quarters. US Paper and Products Production transitioned to Phase D, Recession, in November. Recession will extend through late 219 and place downward pressure on US Pulp, Paper, and Board Mills Production through the same time period. Focus your marketing resources on business sectors with more positive long-term fundamentals. ITR Economics February 218
Market Segments US Commercial Printing Production Index Annual Trend: 99.1 Phase: D Year-over-Year:.% 14 12-Month Moving Average 14 2 Year-over-Year Growth Rate 2 13 13 1 1 12 12 1 1 11 11 1 1 9 9 - - 8 8-1 -1 7 7-1 -1 6 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21 6-2 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21-2 Industry Outlook 218: -1.% 219: -1.4% 22: -.9% US Commercial Printing Production transitioned into Phase D, Recession, since the last report. Production during 217 was virtually even with 216 (down less than.1%). Production plateaued during the last year and a half and was tracking within the forecast range. However, a cyclical peak in October was earlier than previously expected and necessitated a forecast revision. The downward revision was mild with expectations down 1.6% and 1.3% for 218 and 219, respectively. Production will decline into mid-22 before rising mildly in the second half of that year. The US Printing and Related Support Activities Utilization Rate declined during the second half of 217, suggesting Production will decline into at least the second half of 218. Production will rise during the second half of 22 as the paper industry expands. However, Production will not reach its current level during that time. ITR Economics 6 February 218
Market US Paper Bags & Treated Paper Products Production Index Segments Annual Trend: 7.1 Phase: D Year-over-Year: -6.2% 13 12-Month Moving Average 13 2 Year-over-Year Growth Rate 2 12 12 1 1 11 11 1 1 1 1 9 9 - - 8 8-1 -1 7 7-1 -1 6 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21 6-2 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21-2 Industry Outlook US Paper Bags & Treated Paper Products Production to close out that year. Production expectations were during 217 reached the lowest level in 46 years. This revised downward by 12.% and 9.3% for 218 and was a 6.2% decrease from the previous year. Production 219, respectively. transitioned into Phase D, Recession, since the last 218: -7.7% US Logging Production is expected to decline year over report, contrary to the previous forecast. This was due year through the first half of 218. This is consistent 219: -2.3% to the third worst third-to-fourth quarter percent with Paper Bags & Treated Paper Products Production change in the data history. A downward revision to the also declining going forward, in line with the forecast. 22: -1.7% forecast was necessary. Production will decline into the Production will rise during the latter half of 219 and second half of 219. A mild rising trend will take hold in the first half of 22 but is not expected to surpass the Production through mid-22 before decline resumes current level. ITR Economics 7 February 218
Market US Periodical, Book, and Other Publishers Production Index Segments Annual Trend: 8. Phase: A Year-over-Year: -3.4% 16 12-Month Moving Average 16 1 Year-over-Year Growth Rate 1 1 1 14 14 13 12 13 12 11 11 - - 1 1 9 9-1 -1 8 7 8 7-1 -1 6 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21 6-2 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21-2 Industry Outlook 218: -3.1% 219: -9.1% 22: -2.6% The US Periodical, Book, and Other Publishers Production data was revised downward by the Federal Reserve Board. Production during 217 was down 3.4% from the year-ago level. Although the revision was mild, the recovery trend was tempered, with the 2.% decline in October now a 3.2% decline. This necessitated a downward revision to the forecast. Production will decline through 22, with the more robust pace of decline occurring during 219. Production expectations were revised downward by 6.6% and 13.% for 218 and 219, respectively. Production will decline into the second half of 218, but the pace of decline will ease during that time. This is due to an expanding economy as signaled by the accelerating pace of growth in US Real Gross Domestic Product. Year-over-year contraction in the US Publishing Production quarterly data suggests the cyclical peak in Production may come earlier, a downside risk to the forecast. ITR Economics 8 February 218
Market Segments US Media Spending on Print Advertising Annual Trend: $2.9 billion Phase: D Year-over-Year: -11.9% 6 12-Month Moving Total 6 1 Year-over-Year Growth Rate 1 4 4 - - 3 3-1 -1 2 2-1 -1 1 1-2 -2 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21-2 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21-2 Industry Outlook 218: -8.2% 219: -11.3% 22: -9.8% US Media Spending on Print Advertising during the 12 months through October totaled $2.9 billion, the lowest level in almost 1 years. This was an 11.9% decrease from the year-ago level. A downward revision to the Newspaper sector of Spending necessitated a downward revision to the prior forecast. Spending will decline through 22. Spending expectations were revised downward by 2.% and 3.3% for 218 and 219, respectively. The Newspaper and the Business Magazines sectors are declining but at an easing pace. Expectations for the Consumer Magazine sector are that the pace of decline will ease as well in the coming quarters. Identify and penetrate niche markets in the three sectors of Spending for growth opportunities during the general decline expected these next three years. ITR Economics 9 February 218
Market US Durable Goods New Orders (without Aircraft) Segments Annual Trend: $2.627 trillion Phase: B Year-over-Year:.2% 3. 12-Month Moving Total 3. 3 Year-over-Year Growth Rate 3 3. 3. 2 2 2. 2. 1 1 2. 2. -1-1 1. 1. -2-2 1. '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21 1. -3 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21-3 Industry Outlook 218: 4.6% 219: -.4% 22: 7.4% US Durable Goods New Orders (without Aircraft) during The US Purchasing Managers' Index 1/12 transitioned to a 217 totaled $2.627 trillion, up.2% compared the declining trend in September, signaling a mid-218 previous year. Results were above the forecast range by business cycle peak for the New Orders rate of growth. US more than.%, which is consistent with longer-thananticipated rise in multiple leading indicators. This accelerating pace through the first half of 218, Machinery New Orders are expected to grow at an necessitated an upward revision to the prior forecast. New corroborating our outlook for New Orders to accelerate Orders will rise into early 219. A brief period of decline upward through the same time period. Inflationary will take hold for New Orders during the ensuing two pressures could help New Orders avoid recession during quarters before New Orders rise resumes through 22. this business cycle, which poses an upside risk to our 219 Dollar value expectations for New Orders were revised expectations. upward by 3.9% and.8% for 218 and 219, respectively. ITR Economics 1 February 218
Market Segments US Paper Producer Price Index Annual Trend: 188.3 Phase: B Year-over-Year:.8% 21 3-Month Moving Average 21 1 Quarter-over-Quarter Growth Rate 1 2 2 1 1 19 19 18 18 17 17 - - 16 16-1 -1 1 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21 1-1 '8 '9 '1 '11 '12 '13 '14 '1 '16 '17 '18 '19 '2 '21-1 Industry Outlook 218: -.1% 219:.1% 22: 2.1% The US Paper Producer Price Index (PPI) during the The rising overall US Producer Price Index and upward fourth quarter of 217 was up.8% compared to the movement in US Paper Production on a year-over-year same time one year ago. This was a transition into a basis suggest that the Paper Producer Price Index will Phase B, Accelerating Growth, trend since the last rise in the coming quarters. However, overall decline in report. No changes were made to the forecast. The PPI Production and contraction in US Media Spending on will plateau during the first half of 218, before Print Advertising will temper the rise. dropping during the latter half of the year. The Index The ensuing decline in the overall Producer Price Index will then generally stabilize through the first half of and the US Consumer Price Index will place downward 22 before rising during the second half of that year. pressure on the Paper segment during 219 and early 22. ITR Economics 11 February 218
INDICATORS US Leading Indicators Indicator Direction What it means for the US economy ITR Leading Indicator ITR Consumer Activity Leading Indicator US Leading Indicator US Purchasing Managers Index US Total Capacity Utilization Rate 1Q18 2Q18 3Q18 N/A Green denotes that the indicator signals cyclical rise for the economy in the given quarter. Red denotes the opposite. Aggregate leading indicator evidence suggests that the US industrial economy will accelerate in its pace of rise into mid-218. The ITR Leading Indicator and US Leading Indicator suggest possible rise into the third quarter of 218 based on a median lead time to US Industrial Production. The ITR Consumer Activity Leading Indicator and US Purchasing Managers Index signal slowing growth taking hold in the second half of 218. The majority of leading indicators suggests the US economy will grow at an accelerating pace through the first half of 218. ITR Economics 12 February 218
Appendix Market Definitions US Paper & Products Production Index NAICS 322. Industries in the Paper Manufacturing subsector that make pulp, paper, or converted paper products. Index, 212 = 1, NSA. US Pulp, Paper, & Board Mill Production Index NAICS 3221. This industry group comprises establishments primarily engaged in manufacturing pulp, paper, or paperboard. Index, 212 = 1, NSA. US Commercial Printing Production Index NAICS 32311. This industry comprises establishments primarily engaged in printing on apparel and textile products, paper, metal, glass, plastics, and other materials, except fabric (grey goods). The printing processes employed include, but are not limited to, lithographic, gravure, screen, flexographic, digital, and letterpress. Establishments in this industry do not manufacture the stock that they print, but may perform post printing activities, such as folding, cutting, or laminating the materials they print, and mailing. Index, 212 = 1, NSA. US Paper Bags & Treated Paper Products Production Index This industry comprises establishments primarily engaged in one or more of the following: (1) cutting and coating paper and paperboard; (2) cutting and laminating paper, paperboard, and other flexible materials (except plastics film to plastics film); (3) manufacturing bags, multiwall bags, sacks of paper, metal foil, coated paper, laminates, or coated combinations of paper and foil with plastics film; (4) manufacturing laminated aluminum and other converted metal foils from purchased foils; and () surface coating paper or paperboard. Index, 212 = 1, NSA. US Periodical, Book, and Other Publishers Production Index NAICS 1112-9. This industry comprises establishments known either as magazine publishers or periodical publishers. These establishments carry out the operations necessary for producing and distributing magazines and other periodicals, such as gathering, writing, and editing articles, and selling and preparing advertisements. These establishments may publish magazines and other periodicals in print or electronic form. Index, 212 = 1,NSA. US Media Spending on Print Advertising Media spending in the US on print advertising, measured in millions of dollars, NSA. Includes magazine and newspaper advertising. Measured in millions of dollars. US Durable Goods New Orders New orders for durable goods (excluding aircraft) in the US. Trillions of dollars, NSA. US Paper Producer Price Index Cost of production for original manufacturers of paper products. Index, 1982 = 1, NSA. ITR Economics 13 February 218
Management Objectives 1 Model positive leadership (culture turns to behavior) Phase A 2 Establish tactical goals that lead to strategic achievement 3 Develop a system for measurement and accountability re: objective 2 4 Align compensation plans with objectives 2 and 3 Be keenly aware of the BE (Break Even) point and check it regularly 6 Judiciously expand credit 7 Check distributions systems for readiness to accommodate increased activity 8 Review and uncover competitive advantages 9 Invest in customer market research (know what they value) 1 Improve efficiencies with investment in technology and software 11 Start to phase out marginal opportunities 12 Add sales staff 13 Build inventories (consider lead time and turn rate) 14 Introduce new product lines 1 Determine capital equipment needs and place orders 16 Begin advertising and sales promotions 17 Hire "top" people 18 Implement plans for facilities expansion 19 Implement training programs ITR Economics 14 February 218
Management Objectives 1 Accelerate training 2 Check the process flow for possible future bottlenecks 3 Continue to build inventory 4 Increase prices Consider outside manufacturing sources if internal pressures are becoming tight 6 Find the answer to What is next? 7 Open distribution centers 8 Use improved cash flow to improve corporate governance 9 Use cash to create new competitive advantages 1 Watch your debt-to-equity ratio and ROI 11 Maintain/pursue quality; don t let complacency set in 12 Stay in stock on A items, and be careful with C items 13 Consider selling the business in a climate of maximum goodwill 14 Penetrate new selected accounts 1 Develop plan for lower activity in traditional, mature markets 16 Freeze all expansion plans (unless related to what is next ) 17 Spin off undesirable operations 18 Consider taking on subcontract work if the backside of the cycle looks recessionary 19 Stay realistic beware of linear budgets 2 Begin missionary efforts into new markets 21 Communicate competitive advantages to maintain margins Phase B ITR Economics 1 February 218
Management Objectives 1 Begin workforce reductions Phase 2 Set budget reduction goals by department 3 Avoid long-term purchase commitments late in the price cycle 4 Concentrate on cash and balance sheet Reduce advertising and inventories 6 De-emphasize commodity/services in anticipation of diminishing margins 7 Weed out inferior products (lose the losers) 8 Encourage distributors to decrease inventory 9 Identify and overcome any competitive disadvantages 1 Make sure you and the management team are not in denial C 11 Cross train key people 12 Watch Accounts Receivable aging 13 Increase the requirements for justifying capital expenditures 14 Evaluate vendors for strength (don t get caught honoring their warranties with no one to accept returned goods) 1 Manage the backlog through pricing and delivery; try to fill the funnel ITR Economics 16 February 218
Management Objectives 1 Continue force reduction 2 Reduce advertising be very selective 3 Continue to avoid long-term purchase commitments 4 Review all lease agreements Increase the requirements for justifying capital equipment 6 Eliminate all overtime 7 Reduce overhead labor 8 Combine departments with like capabilities and reduce management 9 Select targets of opportunity where price will get the business 1 Tighten credit policies increase scrutiny 11 Look for opportunistic purchases 12 Grab market share as your competitor dies 13 Prepare training programs 14 Negotiate union contracts, if possible 1 Develop advertising and marketing programs 16 Enter or renegotiate long-term leases 17 Look for additional vendors 18 Consider capital expenditures and acquisitions in light of market-by-market potential 19 Make acquisitions use pessimism to your advantage 2 Lead with optimism and can do attitude to mitigate employee anxiety Phase D ITR Economics 17 February 218