Fridays with Dr. Joe:

- Economic Roundup

- The Greenspan Gospel

- Dr. Joe's Q&A


May 2, 2003

Economic Round-Up

There is more great news about the productivity of the U.S. economy. As mentioned in my Quick Take this week regarding employment costs, the estimated productivity for the first quarter of 2003 kept pace with the increases in costs, which is what economists like to see. While total output, and hours were down--mainly due to a sluggish January and February--the output per hour was up. Also released were data for 2002, where productivity was up 5.5%,--a stunning gain, to say the least.

The Institute for Supply Management (ISM) report on manufacturing went down slightly from last month's reading, with things basically staying about the same. The manufacturing index continues to point to contraction in the manufacturing sector.

One of the things the ISM report does not measure is productivity. So if a factor in their judging of the health of manufacturing is manufacturing employment, then if productivity increases (productivity = increasing value of output with lowering value of inputs), the ISM would consider productivity as potentially negative. Just remember that this is one of the factors in the ISM data.

Overall, a disappointing report, but in the grander context of things, I think this index will be showing signs of increase quite soon.

On the Web

Back to top

The Greenspan Gospel

People poke fun at me because I actually watch Alan Greenspan testify before Congress, as he did on Wednesday, and I actually find it captivating. Bush43 said that he would reappoint Greenspan, whom I have not particularly liked as he is not pro-growth enough. The last thing this president wants is a battle over another appointment in a very sharply divided legislative branch, so leaving Greenspan in place makes sense politically. While some of the press is reporting that Alan G. said there is no real need for aggressive tax cutting, some of the other things he says at every single appearance are never reported. Some of these include:

• There should be no capital gains tax at all
• Congress has to stop its spending sprees, which he said no longer have management controls on them as they did in recent years. (Amazingly, budget rules allow for increases to count as budget cuts if their rate of increase is lower than other items. Recent "claims" of unfair decreases in the Veterans' Affairs budget actually represented about a $4 billion increase-I'd like an "unfair" pay "cut" like that! The process is called the "current services baseline" and if businesses or households ran with this kind of budgeting philosophy, they wouldn't be in business very long).

The desire to eliminate capital gains will never fly politically, though economists know that taxing capital decreases growth. Greenspan also said that taxing dividends decreases long-term growth, and that dividends should be tax free (the current proposal is to make them tax free at the personal level, because corporations have already paid taxes on them). You will rarely, if ever, see these comments in the news, and he says them virtually every time he appears. But the slightest bit of negativity towards fiscal restraint and reducing taxes to stimulate growth will get headlines. Greenspan also felt that they still had more room to stimulate from a monetary policy perspective, if needed. Overall, he felt that things were on the road to recovery.

One thing I found refreshing was the questioning by Nydia M. Velázquez (D-NY, Brooklyn area) about getting more help for small business if large corporate dividends become tax free. Because most small businesses are Sub-S, proprietorships, or partnerships, their "dividends" are already tax free (earnings are treated as personal income in these structures). But she made an impassioned plea to take some action to stimulate small business if the big corporations get that break. I started to get a sense of optimism that some tax incentives for small business would actually pass in whatever tax bill emerges.

Back to top

Dr. Joe's Q&A

Question: Do you think the volume and malleability of available data could be driving the perception that "no one really knows" the size of the printing industry, that an embarrassment of riches in information has led to its devaluation? And do you see a Walter Cronkite-type reporter out there providing print industry market data; an individual or organization that exudes credibility and confidence instead of disclaimers?

Answer: Back when I did the TrendWatch thing, I tried to play that role. But the reality is that far too few people who publish numbers provide enough detail. They just give out numbers. My favorite example is the presenter who said, "We asked 1000 printers…" Note that there was no response rate or response base cited; the response base could have been 100 or less. So it pays to listen carefully. The presenter did not lie- the presenter simply put the best face on things.

I also love it when people combine publishing revenues into the printing business, and others include packaging. Talk about putting together apples, oranges and steaks! These things should be separated. And sometimes data that is U.S. only is mixed with worldwide data, causing double-counting and misrepresentation. So I always "left breadcrumbs" (usually known as footnotes). They're not disclaimers, really, but the setting of context and expectations.

I have been in many situations where the numbers I have developed have been pooh-poohed by companies who claimed I "got it wrong" or "didn't understand the new paradigm," only to get resumes from those same executives a year later when they couldn't meet forecasts or even come close to any desirable market penetration (based on their inflated view of the market) with their offerings.

So it comes down to time. It takes time to dig into all of the sources of data, understand methodologies, and deal with things like time lags (such as using three-year old data to estimate what's happening today). And there is always great pressure to make things seem bigger than they are. I frequently see published claims that there are 50,000 commercial printers in the U.S. The real number is more like 28,000 using a narrow definition of the Blue Book Data. And in fact most vendors for high-end equipment have as true prospects only 6,000 of those--not 28,000, not 50,000. It's not an embarrassment of riches at all. It's an undercapacity of effort and an overcapacity of hubris.

Much can be derived from an examination of Census data. While 1997 (the most current Census data available; 2002 data will be out at the end of 2004) seems like a long time ago, inflation has been low and business has been slow, so 1997 Census numbers are still relevant. The annual average total capital investment of individual commercial printing establishments by employee size shown below can help target who are the best prospects. When we say total expenditures, we mean it; it's everything, including their buildings (which is usually around half of these values).

MEAN ANNUAL CAPITAL EXPENDITURES PER COMMERCIAL PRINTING ESTABLISHMENT BY EMPLOYEE SIZE

1-4	$9,994
5-9	$22,739
10-19	$59,365
20-49	$162,330
50-99	$450,947
100-249	$1,095,564
250+	$4,299,641
AVERAGE	$118,313

 

What does this mean? Rather than go through a prolonged analysis, just think of the following: to what size of print business would you best target a $250,000 device? Who can pay for it easily, and who can't? The data show why small businesses tend to buy things on leases or per click agreements and large businesses can buy them through self-financing or standard credit arrangements with their banks. That's simplistic, because there will always be exceptions to generalizations, but you can see where I'm headed. Knowing the data above also tells you what kind of financing to craft for each size of printer. And the data also show why many printers have little money after they buy a press, and also why bundling other equipment with a press sale and its full package financing can be a good strategy. These data only take about 20 minutes to create, and all one has to do is make the effort to crack a Census report open.

And also consider what other neat facts you can get from these data. The top 2,700 printing businesses, those with 50+ employees, represent 70% of industry capital investment. Call it the 7-70 rule: 7% of the printers represent 70% of the capital investment. That is, there's a real break in the characteristics of the business when you pass 50 employees or $5 million in sales. And despite all of the gyrations of the economy and technology, the industry's average rate of capital investment has remained in the range of 5.5% of sales with only minor variations over the last several years, although this year it certainly has declined.

This has massive implications in product life cycle management, product portfolio, pricing, etc. But I've seen the problem of mismatched pricing strategy, technology, and market realities played out countless times. This is why understanding demographics is so important: it reveals behavior, and provides a realistic base for strategic planning. Knowing the true potential for your market is critical.

Back to top