State of the Industry: Print and Packaging

Where will the U.S. economy, print, and packaging trend over the course of 2010 and 2011? The answer to this question depends on the exact path of the recovery from the 2007/2009 recession and the longer term pattern of growth of the global and U.S. economy, along with key dynamics shaping print and packaging. In this article, we assess the likely path of the economy, print, and packaging over the next 12 to 24 months.

Mapping the 2010/2011 economy

The fundamental underlying bias of the U.S. economy is to grow. In fact, since the end of World War II the economy has grown in 90 percent of the quarters and years. Another underlying tendency is that the economy typically gathers strength as it recovers from recessions and grows at above-average rates the first and second full years after the recession ends.

Our current view is that once the data is analyzed, the 2007/2009 recession will be found to have officially ended in the third or fourth quarter of 2009, so 2010 and 2011 should be recovery years. While there is some fear of a "W" recession pattern (double-dip) with another quarter or two of decline, at this time, our outlook is for continued growth, but at a lower-than-typical pace. Also, other important economic metrics, such as unemployment and consumer and business confidence, will remain weak.

At this time it appears that the economic recovery will be modest by past standards, with the economy growing less than 3 percent in 2010 and just 3 percent in 2011. These rates are about 60 to 70 percent of the average recovery pace achieved over the previous four recoveries. Even so, the pace of growth in 2010 and 2011 will likely be higher than the pace of 2012 and beyond, since the first two years of recovery are typically the most robust of the cycle.

Even if the economy performs reasonably well over the next two years as measured by real or inflation-adjusted growth, labor markets and unemployment will lag. Unemployment should remain close to 10 percent into early 2010 before declining at a very slow pace.

With the slow pace of economic recovery and lingering excess capacity, inflation should remain in check at least through 2010, but could start to rise in 2011 with the massive increase in bank reserves over the past year.

Relationships between 
the overall economy and print

Before presenting the outlook for print over the next 12 to 24 months, let's review the key relationships between print and the economy. A perspective on print's performance relative to the economy is provided by examining the relationship between the economy (inflation adjusted or real gross domestic product (RGDP)) and the Printing Industries of America's Print Market Index, which tracks the difference between printers experiencing increased sales with those experiencing decreased sales. Although the economy is recovering, the Print Market Index remains in extreme negative territory.

The official start of the recession was the fourth quarter of 2007, which was the first quarterly decline in real or inflation-adjusted gross domestic product since the end of the 2001 recession. While the economy recovered somewhat in the first and second quarters of 2008, it then went negative for four successive quarters—the first such prolonged decline since the Great Depression. The economy stabilized toward the end of 2009, and the recovery is on track, although it will most likely be very mild.

In this extreme economic climate, print markets hit the wall in mid-year 2008 and continued to fall throughout 2009. The Print Market Index fell throughout 2007, 2008, and the first quarter of 2009 before reaching an all-time low and recovering slightly in the second quarter.

Over the course of a typical business cycle, nominal printing shipments tend to lag economic recoveries and lead economic declines (Fig. 1). This pattern will most likely continue with the current recession and recovery.

Print markets: 2010 and 2011

Since print markets lead recessions and lag recoveries, print will rebound slower than the projected modest economic recovery. However, on the plus side, the 2010 Congressional and state elections are lining up to be particularly competitive and may boost print demand further. Additionally, it appears that advertising markets are beginning to rebound and, given the new-found thrift of consumers, retail print promotion may be fairly aggressive over the next couple of years.

Our bottom-line outlook is for total nominal printing shipments to stabilize in 2010 as they are aided by both the recovering economy and political printing. The outlook for 2011 is for total printing shipments to increase slightly as the economy picks up a little speed and inflationary pricing pressures return.

Traditional ink-on-paper print will most likely still decline in 2010 but stabilize in 2011. The good news is that digital print (toner-based and inkjet) and printers' ancillary services should return to healthy growth next year. Digital (toner-based and inkjet) print is projected to increase by 4 to 5 percent over the next two years. Printers' ancillary services are projected to grow by 2.7 percent in 2010 and by 4 percent in 2011.

Packaging metrics

Currently, packaging comprises approximately $25 billion in annual shipments or approximately 16 percent of the $160 billion in annual printing shipments in the U.S. Generally, packaging is more stable than other sectors of print, which are tied more to advertising and promotional markets. In contrast, packaging markets tend to correlate with shipments of manufactured products. Although, shipments of manufactured products are impacted by economic cycles, they are less sensitive than marketing and promotional spending.

Overall, the packaging segment of the printing industry in terms of profitability has outperformed the industry average. Since 2006 packaging printers have reported increasing profit rates, even at the onset of the current economic downturn. Package printers reported an average profit as a percentage of sales of 5.03 percent in our 2009 study (data collected January 2009 to June 2009, for most recent complete fiscal year), while the printing industry as a whole saw profits drop from 3.0 percent to 1.5 percent of sales (Fig. 2). During the past few quarters, printers have reported continued declines in profitability. Preliminary results from our Fourth Quarter 2009 Print Market Survey indicate that printers profit rates are still declining.

Another performance metric that we measure in the Ratios is return on investment (ROI) as a percent of assets. This measures how effectively a company's investment is producing a profit. In general, package printers have been earning a higher return on their investment over the past few years at about 8 percent in 2007, dropping to 7 percent in 2008, and back up to just more than 8 percent in 2009.

Value-added sales is the term used to describe the sales value of that portion of your product that is manufactured at your plant. It is important because it indicates the cost of the manufacturing you produce. Many companies just concentrate on increasing their sales and do not pay attention to what they are manufacturing. It is wrong to think that just because sales are increasing, your profits will also increase. Increased value-added has a higher correlation to profits than increased sales. As shown in Figure 3, package printers' value-added profits have risen considerably since 2006, from 2 percent to slightly more than 8 percent. Similar to profit as a percent of sales, we expect this number to decline in the 2010 survey (fiscal year 2009).

Although the package-printing segment will continue to be a bright spot in the printing industry, both general and package printers will need to keep a cautious eye on the strength of the economic recovery. pP

Ronnie H. Davis, Ph.D. is VP and chief economist for Printing Industries of America and Edward Gleeson is the manager of economic and market research. For additional resources from Printing Industries of America, visit www.printing.org. To participate in association surveys, contact Ed Gleeson at egleeson@printing.org or 412-259-1756.