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Mondays with Dr. Joe:
May 19th, 2008

Commerce Department Revises Seven Years of Data: A New Look at Industry Trends
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Commerce Department Revises Seven Years of Data: A New Look at Industry Trends

Last year, the Commerce Department significantly revised three years of reporting about our industry. This resulted in some changes in our understanding of the industry's size and direction. I wrote about this last June.

This year, the statisticians went all the way back to 2001, with major revisions starting in 2005. In their announcement, they stated that their revisions began in 2004. The reasons for the changes, in their words were as follows:

• Benchmarking the shipments and inventory data to the 2006 Annual Survey of Manufactures (ASM)
• Adjusting new and unfilled orders to be consistent with the benchmarked shipments and inventory data
• Correcting monthly data for late receipts, reclassification of reported data, and revisions to previously reported data
• Updating the trading day and seasonal adjustment factors for all series

I translate:

Every year, the Commerce Department conducts the Annual Survey of Manufactures (ASM). These data are a survey, and not a Census. The Census covers years ending in -2 and -7, conducted every five years. The Survey fills in the missing years. A Census is a major undertaking, with an attempt to reach every member of the statistical Universe; in this case, every manufacturer. The Survey, on the other hand, uses a projectable sample and other data (such as employment data, statistical models developed from the Census, tax data, and other sources) to measure the size and trends of industries until the next Census comes around.

The data series for printing shipments that we use every month is from a smaller survey (called M3), and every year they update the M3 survey process with the latest data from the ASM. Since the 2006 ASM is now completed, that is why major revisions were made to that year and not 2007. Since 2007 is a Census year, we can expect larger revisions to 2007 shipments data because of the much greater detail afforded by the Census process.

In the ASM and M3 surveys, there are always issues with survey response rates, late returns, and new input (such as employment, tax data, and other factors). The editing process for these surveys is a Herculean effort, and one nice thing about the Commerce data is they always strive to get it right in the long run. It may, however, be a couple of years or more before that happens.

For our industry, shipment levels remained steady from 2001 to 2004, with only the allocation of those shipments to each month being updated. They saved their major revisions for 2006.

Here is a chart showing the shipment revisions (in current dollars) and the degree of the change. The table inside the chart shows the degree of the changes. Just click on the chart to see it in larger format.

Note that they did make changes to 2007. These updates were based on their experience in using the 2006 ASM Survey, and will be updated again next year.

click chart to enlarge on a new web page

In last year's revision, they added about $10 billion back to industry shipments. This year, they took about $2 billion of that away. The changes to 2006 were a -1.3% change, decreasing current dollar shipments by -$1.3 billion.

The chart below shows how the years 2003 to 2007 now stack up on a current and inflation-adjusted basis. On a current dollar basis, it looks like the industry is growing. But we know those dollars in 2003 were worth about 14% more than a dollar today as inflation has eroded their value. Also on a current dollar basis, the industry is finally back at its 2001 level. On an inflation adjusted basis, 2007 is the lowest value for industry shipments since the beginning of our data series, which starts with 1993.

click chart to enlarge on a new web page

This next chart shows how January through March of 2008 compare to the same period in prior years.

click chart to enlarge on a new web page

Today's chart of the week is a further discussion of the revisions made by the Commerce Department. Be sure to visit the WhatTheyThink Economics and Research Center today.

In future weeks, our audio chart of the week will present our analysis of industry conditions with these new updated Commerce reports.

We are creating a special package consisting of the historical data that includes our inflation-adjusted shipments and many other important data. It also includes our forecasts of the industry to 2013. It's now available in our e-store as an Excel workbook with a separate audio commentary file. The press release about this offering has more background.

Industry Fragmentation is a Consolidation Driver?

One of the most persistent observations about the printing industry is that consolidation is ongoing because, like other industries, there are so many printers—as if someone's observation about the number of establishments being “too high” was the only reason for consolidation. In my opinion, there is no proof of this. Rather, consolidation has done little to change the number of establishments and sales per employee, two important industry metrics. While there are highly publicized mergers and acquisitions, there is little to indicate that they are the result of an industry continuing to adjust to new demand levels, and less to indicate they are having much effect on the industry's overall condition.

It is not the number of establishments that is forcing consolidation. It is a dramatic change in the nature of the marketplace. This is the opposite of the 1980s, when the number of establishments was growing because of the rise in demand for process color. Even then, experts were saying consolidation was needed because of too much capacity and too many printers. But as industry shipments rose to meet demand, we were adding 1,000 establishments a year for a time. The impetus for consolidation lies in the nature of demand, and little else. Consolidation is far beyond just mergers and acquisitions: it's the bankruptcies, start-ups, increases and decreases in market share, shifts in technology use, joint ventures, movement of executives, and many other forms, that give shape to an industry over time.

In an environment of true consolidation, this would not be the case. The sales per employee and the shipments per establishment would be rising because there were fewer establishments producing the same level of work. That is not happening in our industry. Sales per employee are rising because of a decrease in the number of non-production personnel, but the rise is so small (1% a year) that it could actually be a remnant of inflation-adjustment; it is likely the effect of automation in offices and other functions. Even if that not the reason, the change in the number of industry establishments closely tracks the change in industry shipments. If we were truly consolidating, the number of establishments would be declining at a faster rate than shipments are, as would sales per employee.

In addition, while it is true that the number of printing establishments has been declining by an average of 1,000 per year for the last 15 years or so, that net number is comprised of an average of 2,000 new establishments less 3,000 closed establishments. Most of the new establishments are not really “new.” Many of them are reconstituted old businesses that have changed their corporate form or are casual combinations of older businesses where the owners decide it is easier to start something new together rather than merge or acquire. For many family businesses, there are so many personal assets or personal business practices tied up in the business that starting from scratch as a new business entity is the easiest way to deal with them.

Why companies even bother to consolidate beyond issues of transition from family owned to professional or outside management is sometimes a mystery. Most mergers and acquisitions do not work out over the long term, and there are numerous reasons for that, as cited in research by Harvard's strategy guru Michael Porter and others.

It is true that some consolidations actually do work out, but they are not easy. They are used to gain entry into new markets or new regions, or to gain new capabilities, or some kind of revenue additions or cost reductions. The businesses do have to deal with the risks of transition, always underestimated, not always insurmountable, and successful consolidations do so.

Ownership in the closely-held printing business often has no other exit. The bulk of consolidations fall into the category of private companies, where a family has developed a single- or multi-generational business that has real value to someone else. If family does not find continued ownership using outside managers attractive, selling is a better option than simply closing the doors one day.

At this time in the industry's life, I believe most of the consolidations have a defensive nature to them. In other words, things did not work out with many of the 1990s M&A activities as originally expected.  Declining aggregate industry volume, new constraints on the marketplace (such as greater activity in environmental regulation and changes in buyer preferences) create a situation for many firms where their investments and strategies no longer match buyer needs like they used to. When the  confidence that future profit levels will be at least equivalent to past profits disappears, owners tend to seek to cash out while they have something worth selling.

A consolidated company still must face the risks of transition. The defense against uncertain business factors is to create a company with better resources, more efficient operations and robust management experience that are more suited to today's realities.

See You in Two Weeks

This column is off for the Memorial Day holiday, but we'll still have a fresh audio chart of the week for your viewing and listening pleasure.

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Dr. Joe Sightings

Quarterly Economic Webinar, June 18, sponsored by MindFireInc, free, details to be announced

Pacific Printing & Imaging Association Fall Conference, September 26 – 28, details to be announced

Graph Expo, Chicago, October 28, sponsored by MAN Roland, details to be announced

Recent Sightings (download slides and audio)

Webinar: Managing Smarter: Magic Numbers to Live By, in collaboration with CEO Advisor and Mergers & Acquisitions Expert Bob Rosen, April 9, 2008.

Economic Webinar of March 26, 2008, sponsored by MindFireInc. (also read post-event Q&A)

Graph Expo's “Speculative Look at Graphic Arts 2017” event, sponsored by MAN Roland, includes forecasts of the industry and its demographics to 2017. For a special treat, the presentation can also be viewed at SlideShare. The audio will play automatically, but the slides must be advanced manually.

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