Good Year Ahead, Say Forecasters

Economic growth and printing market expansion are expected to slow, but not dramatically, in the year ahead.

By Daryl Delano, Economic Analyst -- graphic arts online, 12/1/2000

Although not all of the returns are in quite yet, it's abundantly clear that 2000 was another very good year for the U.S. economy as a whole, and another reasonably good one for almost all sectors of the printing and publishing industry. Further, almost without exception, overseas markets were also stronger in 2000 than they were last year, and much healthier than during 1998.

As we take stock of the economic landscape at year-end 2000, the year ahead is looking pretty good as well, say economic forecasters. A recession still is highly unlikely, but it's expected that some of the developing weakness seen in selected sectors of the economy during the second half of this year will carry over into at least the first six months of 2001.

World energy markets still are unsettled, and as always there's a global "flashpoint" or two to worry about. Given the uncertainties of the world, as well as the global supply/demand relationships for various commodities (ranging from oil to paper to semiconductors) and the economic policy priorities of a new U.S. president, it's too much to hope that 2001 will see economic growth quite as vigorous as during the 1999-2000 period.

Losing some air

But although the economic balloon will lose some air during the year ahead, there's no reason to believe that it will burst anytime soon.

As no business operates in a vacuum, a number of macroeconomic variables-overall consumer and business demand, energy and input price trends, labor supply and costs-are important to all industries. For the printing industry, there exist other issues involving new printing technologies, emerging advertising media, and the role that the industry will play in the fast-evolving, multimedia digital world that will affect industry demand and profitability.

State of the economy

The strength of the current record-long economic expansion continued to exceed all expectations during 2000, and there's little question that good momentum will remain through 2001.

The consensus forecast anticipates that Gross Domestic Product (GDP) in the U.S. will move ahead by 5.2% this year-an unprecedented accomplishment at this stage of the economic cycle, and almost a full percentage point higher than the 1997-1999 average of 4.3%.

Growth in real GDP is expected to decelerate to 3.6% in 2001, giving the country exactly the same solid gain in GDP recorded during 1996, and a level of expansion very much in line with the target rate set by Federal Reserve Board economic policymakers.

If this scenario indeed comes to pass, we'll have achieved the "soft" landing that the Fed has been painstakingly attempting to engineer by raising short-term interest rates, jawboning wage inflation, and identifying the ways in which stronger productivity growth has raised the speed limit for non-inflation-inducing GDP growth.

Moderation, but no dip

The consensus forecasts show moderation, but no declines, in the growth rates for all sectors of the U.S. economy between 2000 and 2001.

After growing at an average annual rate of better than 5% from 1998 through 2000, personal consumption spending is expected to slow markedly to just 3.2% in 2001. This would be the slowest gain in the consumer sector of the economy since 1996.

Business investment spending for new equipment (increasingly dominated by IT purchases, but also including printing equipment investment and upgrades) and buildings is expected to record growth of "only" 9.8% next year, following gains that have averaged 11.9% annually over the past five years.

Easing inflationary pressures in the new year

Along with slower overall economic growth during 2001 should come some easing in recent inflationary pressures, as well as a dramatic decline in corporate profit growth. Higher oil prices have pushed the prices of all energy-related goods and services much higher during 2000. The government's composite measures of producer and consumer price change have captured this acceleration in inflation.

Forecasts for full-year 2000 producer price inflation average 3.6%, but the annual increase for next year is expected to plunge to 1.5%. Similarly, consumer price inflation is seen as reaching 3.3% this year (following gains that have averaged barely 2% over the past three years) but easing to a milder yet still-above-trend gain of 2.7% during 2001.

There is relatively little variation in outlook when looking at the individual forecasts that contribute to the 3.6% consensus for GDP growth in 2001. The GDP forecasts range from a low of 2.5% to a high of 4.4%.

If the U.S. was to achieve the high rate of growth that has been forecast, we'd be looking at an incredible five consecutive years of 4%-plus GDP expansion-something the U.S. economy hasn't witnessed in its two-and-a-quarter centuries of existence. Following six consecutive years when the consensus view has turned out to be much too conservative, perhaps 2001 will be the year that economists get it right.

Partners in the hemisphere

Economic growth in the rest of the world also was much stronger this year than during 1999. Just as for the United States, the consensus view of economists is that we'll see some moderation in GDP, personal consumption, and business investment gains during 2001. However, in contrast to the U.S., where GDP growth next year is expected to fall short of its 1999 performance, overall global economic gains are expected to be better in 2001 than in either 1998 or 1999.

Among our major trading partners, both Canada and Mexico have grown at rates as fast or faster this year as during 1999. Japan's economic growth also has improved this year but remains well below the rates for most of the rest of the developed world. GDP gains are on track to outdistance last year's numbers throughout almost all of Europe, although the annual increases continue to fall short of those recorded by our NAFTA partners.

Latin America as a whole failed to expand its GDP at all between 1998 and 1999, but current trends put it in a position to yield average growth of 3.9% this year. Alone among the regions of the world, the consensus forecast anticipates an even stronger gain of 4.2% throughout Latin America during 2001.

Performance overseas

For the Asia-Pacific region as a whole (including Japan), GDP gains improved from 2.2% during 1999 to a preliminary estimate of 3.6% this year. The consensus forecast view is that growth will ease back just slightly to 3.2% next year, although many individual nations will continue to grow at a much faster rate.

Growth in Western Europe averaged 2.3% last year, but is on track to increase by about 3.3% during 2000. Current forecasts peg GDP growth for the region next year at 3.0%.

Eastern and Central European GDP gains averaged a paltry 1.1% during 1999, but have accelerated to the point that the consensus is now looking for a regional increase of 5.0% this year and 4.2% during 2001.

Slowly but surely, the U.S. trade deficit should finally begin to shrink next year as solid economic growth in the rest of the world soaks up a larger share of our products, while domestic demand for foreign goods on the part of consumers and businesses eases somewhat.

Variable growth in printing

Unfortunately, there's no single indicator that can provide a complete and accurate reading on the overall health of the printing and publishing industry.

The best barometer possible is to paste together government and association reports to create a patchwork mosaic of this business sector. These reports generally show an industry that grew during 2000, and one that is likely to grow again in the year ahead but at a slower pace than much of the rest of the U.S. economy.

Production/output trends

The Federal Reserve Board's industrial production survey shows the nation's manufacturing sector growing at a rate that should yield a surprisingly strong gain of about 5.7% during 2000. Output was growing more slowly during the second half of this year than over the first six months, so we can expect to see some moderation in production gains into at least the first half of 2001.

But even next year, the nation's overall manufacturing output likely will be up by between 3% to 4%, showing exceptionally strong growth 10 years into an economic expansion.

This same Fed survey shows that output during 2000 in the nation's printing and publishing sector bounced back modestly after falling by 0.7% last year, and recording only negligible growth in 1998. By the time the final numbers are in for 2000, it is expected that overall printing industry production will show growth of about 1.3%-much less than in 1997 but well above average annual gains recorded over the full second half of the 1990s.

Capacity levels

The industry hasn't added much new production capacity during the past few years, an indication that printers have a realistic grasp of demand fundamentals. After increasing at an average annual rate of 2.4% during the past 25 years, industry capacity increased by only 0.7% this year. This trend followed capacity expansion that averaged just 1.4% for 1996 through 1998, and a decline of 0.2% in total capacity during 1999.

Overall production capacity throughout the nation's manufacturing sector has grown at an average annual rate of 5.0% during the past five years.

Modest production gains are anticipated for all sectors of the printing and publishing industry next year. Further, overall production capacity in the industry is expected to expand by less than 1% for the third consecutive year. Thus, supply and demand should remain in a near-equilibrium state that should keep inflation under control and allow the industry to fulfill customer orders with a minimum of delay.

Production costs up

The total cost of production for U.S. printers and publishers rose at a faster rate during 1999 than at any time since 1995. Average labor and benefit costs were up an estimated 4.4%, and higher worldwide oil prices meant that much higher energy and transportation costs had to be absorbed, or passed along to customers, by printers.

As expected after two straight years of decline, average paper prices moved up during 2000. Prices for some types of paper rose at a double-digit annual rate through the first half of the year, but inflation was showing signs of stabilizing over the final months of 2000.

When final numbers are in for this year, it looks like paper prices will average about 4% more than in 1999-about the same increase as that recorded during 1997, but well below 1995's surge of more than 20%.

Average prices for various printers' supplies such as ink changed little between 1999 and 2000, although the trend had been generally downward during the prior year. Capital equipment prices moved up at a faster rate last year than the year before, but still were at an annual pace of under 1%.

The year ahead should see costs continue to rise for printers, but at rates below those recorded in 2000. The labor market will likely remain tight, but not quite as rigid as over the past several years. Therefore, the average increase in wages and benefits should be more on the order of 3.5%, almost a full percentage point lower than during 2000.

It's widely expected that energy costs will stabilize in 2001, although they'll probably not move too far below the elevated levels reached this year. Inflation rates for major printing industry product/supply inputs like paper, ink, printing machinery, and parts should be at least marginally lower during the year ahead than they were in 2000.

Tracking industry trends

Information from the Printing Industries of America (PIA) provides additional valuable insight into trends and structural changes in the nation's printing/publishing sector.

PIA's Quarterly Print Market Survey showed for the first six months of 2000 that member companies experienced an average sales increase of about 6.5% above the sales totals recorded over the first half of 1999. Regionally, printers in the Midwest enjoyed the largest over-the-year sales gains during the first six months of this year with a 9.6% increase over the period from January through June 1999.

All of the other regions of the country recorded first-half 2000 sales gains that were below the national average, with the Northeast's 4.9% increase in printers' sales coming in the lowest.

Expectations of sales increases over the upcoming 12 months (in the survey conducted mid-year 2000) showed solid optimism across the board. On average, printers across the nation are expecting the dollar value of sales through the 12 months ending in June 2001 to be 8.4% greater than for the period ended this past June.

There's relatively little variation in outlook by region, with the range of growth forecasts going from a low of 6.2% in the Northeast to a high of 9.0% in the South--in other words, sales gains that would for the most part be as good or better in 2001 as over the past year.

Printing industry sales through the first half of 2000 generally were solid, although not quite living up to the full-year expectations of printers' firm predictions made earlier in the year. This doesn't mean that the final 2000 numbers will necessarily be below the full-year forecasts (printing jobs related to political campaigns and the Summer Olympics had yet to reach their peak over the year's first half), but for many categories it looks like sales gains will turn out to be somewhat disappointing this year.

Market through mid-year

After growing by an estimated 7.3% during 1999, sales in the electronic prepress market segment were running a slightly more modest 6.2% ahead of a year earlier through the first half of this year. Nevertheless, this was stronger growth than in any other printing market segment.

Growth of more than 5% also was recorded from January through June 2000 in packaging printing (6.1%), direct mail (5.9%), book printing (5.4%), and marketing/promotional printing (5.1%). In contrast, sales gains of less than 2% (not nearly enough to recover increased costs of materials, energy, and labor) were registered by the labels/wrappers, manuals/documents, business forms, and annual reports segments.

Traditional prepress sales continued to fall on a year-over-year basis, with a decline of 6.0% over the first six months of 2000.

Nevertheless, the printers responding to PIA's quarterly survey remain broadly optimistic about the year ahead. Annual sales gains of better than 7% are expected in direct mail (9.5%), electronic prepress (7.8%), marketing/promotional (7.5%), and book printing (7.4%). The slowest growth is expected to come from annual reports, labels/wrappers, coupons, and business forms.

Aggregate sales in the traditional prepress market segment are projected to fall by about another 4% in the year ahead, PIA figures show.

On the whole, the PIA survey results suggest that 2001 will be a reasonably good year for the industry. With paper, machinery, and printing supplies prices expected to rise more slowly between 2000 and 2001, overall operating costs for printers should remain under control.

Operating margins

Although there's no question that printing businesses will again have to pay more to attract skilled labor, buy paper and machinery, and ship the final product during 2001 than in 2000, operating margins should hold up reasonably well as long as a fair share of these increased costs can be passed along in the price of the final product.

Profit potential does exist, even for the slow-growing market segments of printing. Through three quarters of this year, PIA survey data showed before-tax industry profit rates of 8.8% for inserts, 5.0% for magazines, 4.9% for label printing, and 4.1% for convenience/quick printing jobs; profits of less than 2% were recorded for direct mail (1.8%) and forms/documents (0.8%).

Final analysis

Despite the continued strong growth in alternative media, print did reasonably well during 2000. But there's no denying that the printing and publishing industry is in the middle of significant transition.

Looking ahead, there's every reason to expect that growth in printing and publishing markets will, on balance, be little better or worse during the upcoming year than during the past several years. That means that most parts of the industry will continue to grow at rates below overall U.S. economic growth.

There remain numerous pockets of opportunity and plenty of exciting niches for growth, both geographically and in terms of specific market segments, but industry growth as a whole will trail that of most other U.S. manufacturing and service industries.

Analysts are reasonably confident that the U.S. economy will continue to grow, and that the world economy will improve during 2001, both of which are positive factors for the industry. At the same time, the upcoming year will likely see printers' input costs rise more slowly than over 2000, but for unit output (as measured by the industrial production series) to grow by less than 1%.

No surge expected

Although the industry dynamics just aren't there to support any surge in overall growth, printers will continue to find profitable niches. Continued productivity gains and innovative approaches to specialty printing will carry the industry forward in the year ahead despite the undeniable challenges posed by the rapid emergence of e-mail, e-commerce, and e-advertising.

In the longer term, however, these fundamental changes in consumer behavior and business operating practices will have to be aggressively addressed by printers. The specifics have surely changed, but the very challenging and increasingly competitive business environment that printers faced for the most part successfully during the' 90s will remain during the early years of the new decade as well.

As printing and publishing continues its transition from a fast-growth industry to one that has reached maturation, there will continue to be good opportunities for innovative printers looking to grow and keep their businesses strong and relevant. Many of the major forces shaping the industry today undoubtedly will undermine demand for traditional printing products and services.

But other "new economy" forces have the potential to enhance demand for a printing industry that redefines itself more broadly as a full-service communications business sector.

Sales growth for printers throughout the nation was estimated at an average annual rate of 6.5% for the 12 months ending at mid-year 2000. Gains were strongest for firms located in the Midwest (9.6%) and weakest for printers in the Northeast (4.9%). Looking ahead, according to the Printing Industries of America Quarterly Print Market Survey, only firms in the Northeast expect to record sales improvement of less than 8% during 2001. Further, almost 20% of printers surveyed by PIA during July 2000 expected sales to grow by 15% or more during the upcoming year.

PIA Quarterly Print Market Survey (July 2000)

The electronic prepress, direct mail, and marketing/promotional printing sectors are expected to record strong growth again next year. Traditional prepress, on the other hand, will continue to lose market share, while printing of business forms, annual reports, coupons, and inserts is expected to grow much more slowly than the overall industry average.

PIA Quarterly Market Survey (actual growth reported by survey respondents for 1999, and expected growth for 2000 and 2001)

* = Forecast