by Dr. Ronnie H. Davis, senior vice president and chief economist, Printing Industries of America
For 2018, will the US economy and print markets accelerate and pick up speed? Or will they break down and fall into a recession after over eight years of slow growth? Or, will they continue the steady but lackadaisical pace of the past eight years? A case can be built for any of these three scenarios.
A look at the economy
The biggest question mark facing the economy is everything going on in Washington regarding tax reform (corporate and individual), health insurance reform, postal reform and trade policy. The mix of these policy outcomes will shape the direction of the economy for the foreseeable future.
PIA’s view is that the economy most likely will continue to grow at a modest pace. However, if there were meaningful corporate tax reform, the economy would likely accelerate beyond the recent two percent growth trend – a 25 percent chance according to PIA’s outlook. On the other hand, continued political gridlock could combine with the aged recovery and cause the next recession – 25 percent likelihood in PIA’s outlook.
The trend scenario would mean a continuation of two percent growth in 2018 and 2019. A recession would mean a reduction in GDP of perhaps 1.5 percent next year and as much as two percent in 2019. The recession could be milder or more severe. The accelerated scenario calls for growth of around three percent next year and 3.2 percent in 2019.
Let’s look at each of these scenarios.
Breakdown: a 2018 recession
- The current recovery at eight years and two months (as of August 2017) now is older than all but three of the other 10 post-war recoveries. However, it also is the weakest of the other 10 recoveries in terms of average growth rate. Does slower growth mean longer growth? Perhaps, as there is a correlation between slower growth and longer growth. Also, it makes economic sense since slower growth could reduce the excessive exuberance and over-investment that can cause a downturn.
- Another historical fact is that the second year after a presidential election has empirically been twice as likely to be a recession year as the other three years in the election cycle. Additionally, the second year after the election has an average variance from trend of 0.5 percentage points in terms of economic growth. However, these facts may be more coincidental than behavioral.
PIA’s assessment is that, although the chance of a recession is higher than it has been for the last few years, it still is an unlikely occurrence. On the other hand, remember the old adage to hope for the best but plan for the worst.
Breakout: accelerated growth
- A healthy dose of regulatory and administrative reform conceivably could add a percentage point to growth.
- Corporate tax reform with a significantly lower tax rate (15 or 20 percent), accompanied by reducing deductions and simplification, could add perhaps as much as a percentage point to growth.
- Additionally, slightly more growth could be achieved with improved trade negotiations; anti-trust and competitive reform; and a return to monetary normalcy.
As indicated earlier, the first of these regulatory reforms already is happening. If meaningful corporate tax reform is enacted late this year or early next year, it is likely the economy will accelerate.
Although this scenario is scored at a 25 percent likelihood, there is a clear but political path to it happening. Also, the underlying fundamentals of the economy must cooperate as follows:
- Productivity must increase after lagging during most of the current recovery.
- Labor supply must demonstrate some elasticity with an increase in labor supply as compensation increases. At the current time, there are over six million job openings, so the economy needs workers to grow.
- There are indications that labor mobility is declining. The number of households moving to other states has decreased even as the number of job openings has increased. A major issue appears to be the high cost of housing in areas with high labor demand compared to those with lower demand.
Continued slow but steady growth
The easiest forecast always is for more of the same. The following are key supporting factors for this view:
- First, and most importantly, is the linear momentum of eight years of steady growth.
- Global economic conditions are healthy but not accelerating or slowing, adding another dose of momentum.
- The political environment remains messy, and any tax reform may end up too little too late or not that significant.
To sum up, the economic outlook is most likely slow but steady growth. However, there is significant chance of either a recession or an acceleration of growth.
Print markets in 2018
Print will, of course, generally track with the economy in 2018. Over the last few years, most printers that survived the Great Recession have seen their sales recover, although it has taken a few years. The typical printer that managed to survive the recession still took a severe hit in sales over the years 2008 to 2010 – a sales decline of almost $300,000. On the plus side, survivors’ sales swelled by over $500,000 in the recovery phase of the cycle.
On an annual percentage change basis, total sales of the average surviving printer (since many printers did not survive the recession) dropped by almost 10 percent in 2009 before stabilizing in 2010. Since the end of the recession, the average printer has experienced a single-digit positive sales increase each year.
As previously pointed out, there are six key reasons why print and printers have largely been healthy since the end of the recession:
- Print has hit its sweet spot in the mature recovery phase of the economy.
- Most of the severe displacement of print by digital media now is behind us.
- Labels, wrappers and packaging print serves as an anchor on print sales as it generally tracks very closely with the overall economy.
- Recenly, print marketing and promotion, particularly direct mail, has demonstrated its effectiveness as a premium marketing and promotional media.
- Even the print sector most impacted by digital media – informational and editorial print (books, newspapers and magazines) – has been doing relatively well lately.
- Printers themselves have adjusted their business models to take account of new industry trends and realities.
As of mid-year, print is growing and is in the middle-range of industries that are growing, according to the latest data from the Institute for Supply Management. The ISM Manufacturing Survey Report, covering 22 manufacturing sectors for July, shows the printing industry ranked number seven of 14 sectors reporting growth. Print also ranked number seven of 14 sectors reporting growth in production. Print’s rank was slightly higher for employment growth; it was ranked number five out of 11 sectors reporting growth.
- In the optimistic scenario, overall print shipments increase by two-plus percent next year. In terms of industry profitability, the average printer’s profit rate would likely increase by about 0.5 percent over trend to around 3.5 percent of sales.
- The recession scenario would reduce total print and print-related shipments by around two to four percent next year. The typical printer’s profits would dip significantly until the recovery is underway.
- The middle, most likely, scenario would result in stable or slightly growing overall print sales in 2018. In this scenario, printers’ profits remain relatively stable at three percent of sales.
- In the acerbation scenario, profits would jump significantly to historic highs of 3.4 percent of sales in 2018 and 3.5 percent of sales in 2019.
- If the economy falls into a recession in 2018, printers’ profits would be wiped out and turned into losses for both 2018 and 2019.
- In the trend scenario, profits would remain at three percent of sales for both 2018 and 2019.