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Mondays with Dr. Joe:
March 10, 2008

Dr. Joes Column
Printing Shipments Disappoint... Again
It Can Be Done
Upcoming Dr. Joe Sightings

When I Left this Page Three Weeks Ago, the Economy was in Bad Shape; Now It's a Disaster. Can't I Trust You with Anything?

Friday's unemployment report seems to have convinced everyone we're in a deep, dark recession. Let's see... if full employment is between 4% to 6%, then a 4.8% employment report is good. Has the number of workers on payrolls gone down? Let me check... ummm... there are +860,000 more people employed  in February 2007 than in February 2006. That seems okay, not the best, but okay. In the household survey, there are +105,000 more workers than last year, but that's understandable since the construction business has taken quite a beating. Perhaps a longer term view might shed some light on the horrible economy. If the recovery started in August 2003, then it seems that there are more than +8.5 million employed people since that time. This is very confusing. Maybe initial jobless claims data can help. Let me look at this now... okay, the four week moving average dropped from 361,000 to 359,500... and we're well below the 400,000 level that indicates a slowing economy. We've obviously fallen into a horrible and deep abyss: we might need a stepstool to get out of it.

The first rule of understanding what's happening in the economy should probably be that all economic reporting, and corporate reporting, is always about “what have you done for me lately.” Lately, those reports are not pretty, and not enough time is being spent discussing what's really wrong: inflation.

The internals of the unemployment report look dire, the way many of us look when we get out of bed in the morning. The payroll report for February went down by -63,000 workers, December's +82,000 reading was cut in half to +41,000, and January's -17,000 was revised down to -22,000. The net three-month figure is -44,000. In all of the banter among the talking heads on financial television and in the online reports, there is nary a mention about how payroll data lag the economy. The payroll data are bad now because things slowed down more than a quarter ago.

The household survey is a better indicator of the current state of the economy. That peaked in November 2007, at a record employment of 146,647,000. It has dropped to 145,993,000, a -267,000 decrease, or a -0.18% change. Even in the short term, the reporters are making way too much out of the employment reports.

More interesting is the effect of the Federal Reserve debasing the currency to prop up the financial system, cheapening the dollar. The inflation that this unleashes, in a competitive world market for goods and services, means that businesses will have higher costs that cannot be fully passed along, this will result in cutbacks in budgets and employment. These higher costs for manufacturing materials were previously paid for by productivity and increasing sales levels. The Fed's easing of money will have the exact opposite effect than desired.

While the experts keep patting Ben on the back for his bravery and for doing the right thing, he does seem like a financial version of a drug dealer, giving out free samples to make sure his clientele stay hooked. The market might be doing what should have been done had it been left alone. There are many anecdotal reports in the media, and in the Fed's own Beige Book, indicating that although rates are lower, banks are tightening up their approval processes. That is, even though there is lots of cheap money around, it's hard to get. It would have been braver to tighten and have the pundits talk about “tough love” instead.

Overall, I'm still in the camp that there will be very slow growth with increasing inflation. This is a combination which will be corrosive to earnings and create a threatening political environment as workers realize that any wage or productivity increases they get (if any) are worthless. Since the general public has no idea what a “Fed” is or how money actually works, there will be pressure for acts of economic grandstanding which will have unintended consequences. (The favorite is always lengthening the amount of time unemployment payments last, which actually ends up keeping people out of the workforce and lengthening economic downturns because those workers are not creating goods or services).

As I lead up to the economic webinar of March 26, I'm reviewing all of the assumptions we have made in our analysis, and so far they seem to be holding up. It's always important to not make every forecast or decision based on the last thing you heard, however tempting that might be.

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Printing Shipments Disappoint... Again

January 2008 printing shipments were very disappointing. On a current dollar basis, they were down -$228 million, or -2.8%. On an inflation-adjusted basis, they were down -$575 million, or -6.8%. What made the report worse was that the initial December report was revised down by more than $200 million.

What was even creepier was what this did to our long-term forecasting models. We run several models, some very sensitive to change, others not. The one that is rather indifferent to change has this year (as measured in inflation-adjusted dollars) at $99.4 billion, just under last year, and at $90 billion in 2012. The more sensitive, aggressive one forecasts 2008 at $92.3 billion, with $66 billion in 2012. The latter is too difficult to contemplate, about a -6% decline in volume per year. It's not likely to play out that way, but you should always have a business plan that considers that kind of scenario.

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It Can Be Done

The February edition of the NAPL Business Review included an article written by senior economist Joseph Vincenzino entitled “'Casual' Benchmarking is Insufficient for Success.” I highly recommend reading this article.

A table comparing annual growth rates of leaders and the industry at large caught my attention.

For the years 2000 to 2007 , the average growth rate of leaders (11.4%) was 9.5 times that of the industry (1.2%). But wait, there's more!

Intrigued, I conducted additional analysis. I compared these growth rates with the annual current-dollar change in Gross Domestic Product (as NAPL data were not adjusted for inflation) and the Consumer Price Index (CPI to determine first if the leading companies had superior growth, and secondly, if they were at least keeping up with the loss in the value of the dollar.

Here is the chart with all of the original data and what I added from government sources; NAPL had annualized the data with a year ending in June, and I adjusted the GDP and CPI data accordingly:

Compared to GDP, NAPL's leaders had an average growth rate that is twice that of GDP (11.4% vs. 5.2%), and almost four times the inflation rate (11.4% vs. 2.9%).

The chart below shows by how much the NAPL leaders exceeded GDP growth. On average, it was 4.3 percentage points, while the industry did not beat that growth rate in even a single year, running almost 6 points below economic growth.

Leaders can have tough times, but they still do better than the industry at large. For the bad years of 2002 to 2004, leader companies did “less worse” than the industry.

Note how leaders’ growth changed once those sub-par years passed. Coming out of that rough period ending with 2004, leaders had exceptional growth, in the range of +13 percentage points above GDP. Some of those increases might be from consolidation, but nonetheless, they had to be healthy enough to be able to consolidate and still grow.

The minimum benchmark to beat is inflation. Basically the CPI indicates the amount of dollar growth needed just to stay even. For 2007, a company needed to grow +4.1% to retain the same dollar value of revenues. That is, if sales were 100 at the end of 2006, they had to be 104.1 to just stay even because of the dollar's loss of purchasing power.

As the chart below indicates, only in one year did the industry leaders’ businesses actually shrink. In all other years, they grew. The average growth rate for leaders was 8.5 percentage points more than CPI per year, which is exceptional considering that industry growth is negative.

One of the problems with these kinds of data is that there is usually no way to indicate that the leaders are the very same companies every year (one company could have had a great year, and then dropped out of the leaders’ group the next). In that sense, it is not a longitudinal study, which tends to be expensive and difficult to do. Nor do we know the kinds of bottom line results of these leader companies, but we can suspect that they lead in profits as well. What these data do show is that it is possible to excel in a declining market, and to do so in a convincing manner.

I always do my best to remind my readers and my speaking audiences that while I present aggregate industry data, it should not be assumed that individual companies cannot do better. Indeed, they can.

The only thing that companies can really manage is their costs, and nothing else. Markets determine prices. Costs are expended to create the acquisition of resources outside the enterprise that have greater value. The leaders in the NAPL article seem to have figured that out.

(You might also find a prior column from 2005, “How the Other Three Quarters Live” to be of interest, if you did not read it at that time).

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Dr. Joe Sightings

Quarterly Economic Webinar, March 26, sponsored by Mindfire; free, details to be announced soon

PrintFest 2008, March 27-29, Anaheim Convention Center, Anaheim, CA

Offset & Beyond, April 27-30, Renaissance Hotel, Schaumburg, IL

Print Services & Distribution Association 2008 Spring Technology Conference, April 30 - May 2, Savannah, GA

Recent Sightings (download slides and audio)

Economic Webinar of December 12, 2007, sponsored by Presstek (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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