Economic & Print Market Flash Report

Volume 3 March 2011

Updated Economic and Print Market Scan: Approaching Prints Sweet Spot in the Economic Cycle Dr. Ronnie H. Davis, Vice President and Chief Economist The outlook for the likely path of the economy and print markets over the next 12 years is brighter than it has been in some time. If our forecast holds, we are heading into the sweet spot of the economic cycle for printthe mature recovery phase. Surviving printers in this likely environment will enjoy healthy sales gains and printers profits will return to their historic levels. However, there are many more sharks in the water than usual, and any one of these could disrupt this smooth sailingescalating inflation, oil price increases, falling dollar values, the government debt crisis, and rising interest rates. Indeed, the risk of escalating inflation is particularly worrisome given the turmoil in the Middle East. The imperative for printers is caution and flexibility in planning, investment, hiring, and budgeting even with an increasingly optimistic outlook. The Economy: Recovery Gains Momentum At this time the outlook for the North American economy is for modest to fairly robust growth. In fact, inflation-adjusted Gross Domestic Product (GDP) will likely grow by 3.3 percent in 2011the highest rate since the 3.6 percent in 2004. Looking towards 2012, Printing Industries of Americas outlook is for inflation-adjusted GDP growth of 3.7 percentthe highest annual rate since the 4.1 percent in 2000. Other less likely scenarios include a sluggish recovery and a return to recession. While these are less likely scenarios, we present them for planning purposes should conditions change in the next few months.

Economic & Print Market Flash Report is published by Printing Industries of Americas Economic and Market Research Department and is available only to members of Printing Industries of America.

Economic Scenarios
RGDP Change 2011-2012

Printing Industries of America 200 Deer Run Road Sewickley, PA 15143 www.printing.org

1
2011 2012 Likely Rebound 3.3 3.7 Sluggish Recov ery 2.7 3 Double Dip 1 2

Looking back at the economic track record since 1995 demonstrates both the degree of decline from the 20002001 and 20072009 recessions and the recovery so far and projected over the next two years.

The Economy 1995-2012

% change in real GDP
6 4 2 0 -2 -4 1995 2000 2005
0

201011 12
-2.6 2.7 3.3 3.7

RGDP 2.5 3.7 4.5 4.4 4.8 4.1 1.1 1.8 2.5 3.6 3.1 2.7 1.9

RGDP
2010 estimated and 2011-2012 projected

Our outlook for the likely quarterly path of the economy in 2011 and 2012 demonstrates the building strength as the recovery matures. In this forecast the economy bounces up to 3.2 percent growth in the fourth quarter of 2010 and continues growing at a robust pace in 2011 and 2012.

Economic Outlook
By Quarter 2011-2012
5 4 3 2 1 0 q3 q4 2010
% change 2.6 2.8

q1
3

q2 q3 2011
3.2 3.4

q4
3.4

q1
3.5

q2 q3 2012
3.6 3.7

q4
4.1

Annual rate of change by quarter--"Real GDP"

Labor Markets and Unemployment Even with the projected path of the recovery, labor markets will remain in an oversupply situation for a long while. A standard rule of thumb is that the economy has to grow at around five percent for a full year to lower the unemployment rate by a full percentage point, so it will take considerable time to soak up the large pool of unemployed and discouraged workers that have accumulated over the last three years of economic turmoil. Most likely, the national unemployment rate will range over 9 percent for most of 2011 and over 8 percent for 2012. The most likely path of the unemployment rate is a range of 99.5 percent next year and 8.5 to 9.5 in 2012. The bottom-line implication for print is that print demand is generally correlated with total employment, so soft labor markets restrict printing sales.

Inflation Price levels should remain fairly stable over the next couple of years given the slack in the economy. However, inflation risk may start rising with the incessant bond buying and money creation over the past couple of years and the purchases at the end of this year and early next year already announced by the Federal Reserve. Price pressures are already showing in commodities and oil. If conditions hold, inflation for full-year 2010 is expected to be around 1.2 percent, which is just about the minimum level targeted by the Federal Reserve as a healthy rate of price change. The outlook for inflation in 2011 is for a slightly higher rate of about 1.7 percent as the economy recovers. Expectations for 2012 are more uncertain, but at this time a rate of around 2 percent is a reasonable forecast.

Future Unemployment Rate

How Fast a Recovery?
12 10 8 6 4 2 0 200720082009201020112012201320142015201620172018
Past Recessions Recent Recessions Recession/Crisis Govt. Forecast* 4.5 4.5 4.5 5.5 5.5 5.5 9.5 9.5 9.5 8 9.8 10.2 9.8 6.5 9 10 8.9 5.5 8 9.5 7.9 5 7 9 4.8 6 8.5 4.5 5 7.5 4.5 4.5 6.8 4.5 4.5 6.5 4.5 4.5 6.2

Past Recessions Recession/Crisis

*End of Year

Recent Recessions Govt. Forecast*

Print Outlook for 20112012: Approaching Prints Sweet Spot If our most likely outlook unfolds as projected, we are heading into prints sweet spot of the economic cyclethe mature recovery phase. If the economy performs as projected, print markets should grow by around 3 percent or so in 2011 and 2012 based on the typical lag between the economy and print in recovery periods. However, even with the recovery achieved in 2010 and the projected dollar volume of 2011 and 2012, printing shipments will remain below pre-recession levels.

Print Scenarios 2011-2012

Printing Shipments (% change in shipments)

2011 2012

Likely Rebound 3 3

Sluggish Recov ery 1 1.5

Double Dip -1 1

Printing Prices Printers will face conflicting pressures with cost increases from suppliers on the one hand and price sensitivity from customers on the other. Most likely, the result will be fairly stable printing prices with some passing on of cost increases. Printing Plants Over the next two years there will be a continued shake out of printing plants from industry restructuring. As the surviving plants pick up the sales of the failing plants, they will, of course, outperform the overall print markets. Perhaps around 1,500 printing plants may go out of business in 2011 and another 1,000 in 2012. This amounts to around 4 percent of plants in 2011 and 3 percent in 2012, a total of 7 percent. Survivors Sales The bad news of plant closures will create good news for the survivors, as survivors will likely see their overall sales grow by fairly significant rates over the next two years.

Survivors vs. the Market

% change in shipments next two years (2011-2012)

Market

Total Conv. Digital Anc.

Survivors

-5
Total Conv . Digital Anc.

0
Market 6 -1.5 10 10

10

15
Surv iv ors 12 4 16 16

20

Printers Profits Printers profits tend to lag both print sales and the economy. As the economy continues to recover, then print profits should continue to rebound over the next two years. Our projections call for overall industry profit rates to rebound to around 2 percent and profit leaders to more than 9 percent in 2011 and 3 percent and 10 percent respectively in 2012.

Print Profits and the Economy

1999-2010
12 10 8 6 4 2 0 -2 -4 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
RGDP 4.8 Printer Prof it 3.4 Prof it Leaders 10.2 4.1 3.2 10.9 1.1 3.1 10.5 1.8 1 8 2.5 1.6 8.4 3.6 1.7 8.7 3.1 2.5 9.4 2.7 2.7 10.3 2.1 3.4 10.1 0.4 3.1 9.7 -2.4 1.6 9.4 2.7 1.4 8.5

RGDP

Printer Profit

Profit Leaders

Sharks in the Water: Potential Disruptions and Their Impacts As discussed so far, the outlooks for the overall economy and print markets are generally optimistic. However, there are many sharks in the water that could derail this smooth sailing forecast. A summary of these risks, along with corresponding impacts on print markets and printers, is presented below: Risk: Inflation Escalates Currently, overall inflation remains in check. However, prices are escalating on various industrial and food commodities, including oil (see below). Combining this with the vast sea of bank reserves created by the Federal Reserve over the past year or so creates substantial inflation risk. The risks may be manageable and the Federal Reserve may be able to steer the economy around the problem. However, caution is in order. Impact on Print Markets and PrintersRising input prices over the near term and wage and salary pressures further down the road are likely. Paper, ink, and other materials costs comprise about 30 percent of cost and could escalate. Also, as the cost of gas goes up ($4.00$5.00 per gallon?), delivery costs will rise substantially. Printers need to be prepared for thisfocus on waste and spoilage and other efficiencies to reduce materials costs. Also we may see a return to delivery surcharges as was common a few years ago. Printers must remain cautious in their spending, continue to conserve cash, and take a hard look at the numbers on possible investments. However, at the same time, printers need to remain focused on building a sustainable business model and invest in training and education for their key staffers. Risk: Oil Price Shock In addition to oil price implications discussed above, oil price escalation caused both by inflation pressures and more significantly by the declining value of the U.S. dollar is a significant threat. Further, escalating tensions in the Middle East (particularly Egypt) are extremely worrisome. Beyond increasing inflation is the risk of another recession caused by the large bite that rising oil price take out of consumer and business spending. The more general economic result could be a return to recession combined with inflation. Impact on Print Markets and PrintersThe key message is to not get too entrenched with the recovery and increased print sales. The recovery could crash from an oil shock. Be cautious on spending and investments.

Risk: Interest Rates Rise Substantially If prices begin rising beyond current rates and inflation expectations rise accordingly (as is already happening), then interest rates will also rise (as is already happening). Rising interest rates could begin to slow the pace of the expansion and even lead to a slowdown in economic activity. Impact on Print Markets and PrintersAgain, caution is in order regarding spending, cash outlays, and investment. Risk: Government Debt Crisis Creates Turmoil in Credit Markets Debt is now at more than 62 percent of Gross Domestic Product (GDP), and it is forecasted to reach 100 percent by 2020 unless the current trajectory is changed. The implications for the economy are reduced demand for government debt (both domestic and foreign) and rising interest rates and dollar depreciationboth bad for the economy. Impact on Print Markets and PrintersMore of the samebe flexible, be careful about longer term commitments, and be cautious regarding spending and investments. Risk: Economic Decline Although the economy has achieved growth rates above the 2-percent stall speed over the past few quarters, the issue of sustainability remains. In particular, any of the above disruptions could destabilize the trajectory of the economy and send it into a new recession. Impact on Print Markets and PrintersMore of the samebe flexible, be careful about longer term commitments, and be cautious regarding spending and investments. While the outlook is for the economic recovery to pick up steam over the next two years and pull print markets along, there is an extremely large number of potential disastrous bumps ahead. Anyone of these could derail the recovery and, most likely, if any one of them happens, the contagion will spread to the others. The bottom line from this discussion of sharks in the water is that printers, industry suppliers, the National Association, and affiliates must remain extremely vigilant and flexible in planning and implementing programming during this tenuous period.

Planning Insights and Lessons So what are the appropriate lessons for printers and suppliers for the next 12 years based on this scan? Here are a few: Be CautiousFirst, while the projected path of the economy and print markets is for an upswing, the outlook is very tenuous and a number of factors could disrupt the recovery. Printers and suppliers must be prepared for another downturn and remain nimble and lean. Be FlexibleSecond, since print markets are in a seemingly perpetual disequilibrium, printers, suppliers, and the Association cannot wait for the market to settle. An attitude of accepting constant change is essential. Hence, market vigilance and quick decision making is essential.

Focus on FutureThird, the decisions made today need to be focused to the futuremore specifically for printers on the race to the future. If they plan on surviving to the long run, they need to take steps today to move their firm up the survivability ladderfrom expendable to at risk to survivor to SuperPrinter. Focus on Management Tools for Efficiency and ProductivityFourth, before you can solve a problem (in this case surviving and thriving in the future) you need to define the problem, map out the path, and measure progress.

Focus on Transition to Higher Value AddedA primary key to surviving (and in many cases thriving) for printers is the imperative to migrate the value added that you provide to customers, which means moving toward a more sustainable path of ancillary services and solutions to management services. At whatever point printers are currently along this path, they must consider the need to move further to the right to be successful in transitioning to the future.

Be PositiveFinally, with all the negative news about sales declines, firm liquidations, bankruptcies, and other issues of the past few years, you must, however difficult, maintain a positive attitude and rally your employees and customers in the same direction.

Now Available--Competing for Print's Thriving Future: Understanding and Taking Advantage of Emerging Economic and Industry Forces by Ronnie H. Davis, Ph.D. The graphic communications industry is facing very serious challenges at this time, but that doesn't mean there isn't a lot of life and opportunity in our future. Competing for Print's Thriving Future focuses on an overall theme of the need for a new focus on positive thinking regarding the industry. In 18 chapters and 3 appendices, it addresses how printers can create their own positive future by understanding and taking advantage of the emerging changesthe changes that are shaping the printing industry of today and tomorrow. To order from our Online store: http://www.printing.org/node/9179?c=38786

Current Surveys All Ratios participants receive a free volume of your choice for participating. 1. 20112012 Ratios Survey: www.printing.org/ratios (deadline April 29, 2011)

10