NAPL Biz Trends

Statistical Whiplash

Just when all looked as bleak as can be—Fannie Mae and Freddie Mac on the verge of collapse, oil prices approaching $150 a barrel, and the Dow Jones Average skidding below 11,000—oil prices plunge to under $130 a barrel, some financial institutions report better than expected earnings, the stock market recoups some ground, and industrial production increases 0.5% in June. What are we to make of all this? Simply, the economy is not sinking into an insurmountable abyss, but very formidable challenges remain.

One of those challenges is inflation. Spurred by jumps in food and energy prices, the Consumer price Index (CPI) has risen 5.0% for the 12 months ending June 2008. Although at 2.4% the so-called “core CPI— which excludes food and energy— is up only half that, consumers are feeling the pinch as earnings are not keeping pace. The Producer Price Index (PPI) for finished goods shows a similar picture for the 12-month picture, spiking 9.2% overall and up 3.0% excluding food and energy. And just like consumers, producers are being squeezed by the rising costs. The weaker dollar definitely isn’t helping. Data from the Bureau of Labor Statistics show that in June non-petroleum import prices were up 7.3% above a year ago. In the previous 12 months they were up only 2.8%.

While the economy is facing challenges on inflation and other fronts, probably none is more formidable than maintaining confidence in our financial system. The problems at Fannie Mae and Freddie Mac, along with the collapse of IndyMac Bank in California are just the latest strains to appear. There could very well be others down the road. The economy will adjust and work its way through current difficulties, but to do so, a well functioning financial system is imperative.

Joseph Vincenzino

Profitability Squeeze Continues

We know that overall profit levels are being hit by weak economic activity and rising costs. Data from the Bureau of Economic Analysis (BEA) show that on a year-over-year basis, the growth in corporate profits before taxes (without inventory valuation and capital consumption adjustments) turned negative in the first quarter of 2008 (-3.8%). Indications are that most likely the slide continued in the second quarter. In 2006, profits rose by almost 14.5%—quite a come down. Profit levels are down, but what about profitability?

Data in the last release on Productivity and Costs from the Bureau of Labor Statistics (BLS) show that unit profits for the nonfinancial corporate sector fell 5.8% in 2007, wiping out the entire increase for the previous year. The decline continued at a similar pace in the first quarter of 2008. Note that the drop off in unit profits occurred despite gains in productivity (output per employee hour) of 2.2% in 2007 and 3.0% year-over-year in the first quarter of this year.

We can see from these data that a profitability squeeze essentially is occurring economy wide and printers are not exempt. Close to half (47.6%) of the NAPL Printing Business Panel reported pre-tax profitability decreasing in June compared to last year—almost double the 25.6% reporting that profitability was increasing. Exactly half of the Panel reported that their prices in June were higher than a year ago, but for many not enough to protect profitability. In the current environment, productivity gains are as important as ever, if not more so. But clearly we need to take other steps.

Joseph Vincenzino

Structural Changes in Jobs

Will recent job losses reverse themselves once the cyclical downturn in the economy ends? According to the latest report from the Bureau of Labor Statistics (BLS), the economy has shed 438,000 nonfarm payroll jobs in the first half of 2008, virtually wiping out all of the increase during the prior six months. On the surface, it would appear that the January-June job losses were concentrated in construction (-261,000) and manufacturing (-235,000). However, the impact of the weak economy on jobs is being felt across the board. Other sectors recording large job losses during the first half of the year included retail trade (-162,000) and professional and business services (-200,000).

But the weak economy isn’t the only influence on job totals. Even in sectors experiencing job gains such as leisure and hospitality (88,000), education and health services (262,000), and government (126,000), we know that adjustments are taking place—adjustments not only to weaker demand, but also responses to higher costs, particularly energy.

The latter are structural in nature—companies altering their operations to achieve greater productivity and reduce costs. While net job creation will no doubt resume at some point after the economy rebounds (remember labor markets are a lagging indicator), many of the structural changes are here to stay, or at least will be with us quite a bit longer.

Joseph Vincenzino

Mood Sours

The government, Bureau of Economic Analysis (BEA) to be exact, reported another slight upward revision to first-quarter GDP. The latest results show an annualized gain of 1.0% for the period, which follows an increase of 0.6% in the previous quarter. When tallied, the current quarter also is expected to record a gain of about 1.0%. The latest data on personal income and consumption show that consumer spending is just beginning to get a boost from the tax rebates, rising 0.4% in May—the fastest monthly gain since August 2007. A word of caution on the economic data: July is the month when the economic landscape gets revised for the previous three years, and sometimes the revisions are substantial. That being said, we may still skirt recession. Why the increasingly sour mood?

Any glimmers of hope in the data are being totally overshadowed by daily frustrations of adjusting to sharply higher gas and food prices. Various added fees and surcharges aren’t helping. Throw in 500-year floods, wildfires, plunging stocks, and its little wonder that consumer confidence is dropping like a stone. Confidence among business executives isn’t that great either, definitely not among printers. Recent data from the NAPL Printing Business Panel show confidence at its lowest level since October 2001—the survey just after 9/11.

As we look forward to celebrating our nation’s independence, keep in mind that there are no quick fixes. Independence didn’t happen overnight and neither will the economic turnaround. Nonetheless, adjustments are being made. Adjustments in the autos we’re buying, the traveling we’re doing, and the homes we’re purchasing. In time, conditions for solid economic growth will be in place. That is the nature of a market economy. It is also the nature of a market economy that with rewards, there are going to be setbacks. We can’t pinpoint when the economic turnaround will take hold, but from all indications, the overall economy is not collapsing.

Joseph Vincenzino

Skirting Recession—So What

Will the U.S. economy skirt a recession? We very well might. Less than half of the participants in Blue Chip Economic Indicators see the economy currently in or sliding into recession. A composite index of leading economic indicators published by the Conference Board rose 0.1% in May, following a similar increase in April. However, lets not pop the champagne, not just yet.

At best the economy is quite weak and not likely to record any significant recovery for some time. The Blue Chip consensus shows the economy essentially flat in the current quarter, with an expected increase in GDP of just 0.4%. GDP growth adjusted for inflation is not expected to increase faster than 2.0% until a year from now. And 2.0% does not exactly signal a great economy. If these are the results, the National Bureau of Economic Research (NBER) may not designate a recession. However, keep in mind that these data are subject to revision, so we’re not going to know for some time.

In any event, focusing on the “recession/no recession” argument misses this key point—a weak economy and rising costs are exerting downward pressure on profitability. This is definitely true for printers. Over 43.0% of the NAPL Printing Business Panel reported in April that pre-tax profitability was decreasing—the highest such reading in almost 5 years. But it’s also true economy wide. In other words: It’s also true for your current and prospective clients. Initial estimates show a sharp falloff in pre-tax corporate profits in the U.S. for the first quarter compared to a year ago. In this difficult economic environment, your clients are facing challenges. How can you help them?

Joseph Vincenzino

Inflation Up-What A Surprise

Data released by the Bureau of Labor Statistics (BLS) show that consumer prices rose by 0.6% in May—their fastest increase since November. We all know the culprits; food and energy. The latter showed a one-month jump of 4.4%, with gasoline spiking 5.7%. Just in time for the summer driving season. Food wasn’t nearly as bad rising 0.3% in May, but it is up 5.1% for the year. On a similar basis, gasoline was up 20.8%, while the overall CPI was up 4.2%.

The so-called core CPI, which excludes food and energy, was much more tame—up 0.2 % in May and 2.3 % for the year. While the “core” concept is useful for determining embedded inflationary pressures and has policy ramifications, food and energy costs are soaking up household purchasing power. And there doesn’t seem to be much relief in sight. The only areas where consumers seem to be catching a break are apparel and autos.

You wouldn’t think that consumer purchasing power is being crimped at all based on the May retail sales figures released by the Census Bureau. Advance data show May sales at $385.4 billion, an increase of 1.0% from the previous month—a larger increase than expected. Even when we exclude gasoline stations and grocery stores, retail sales were up 0.9%. It looks like consumers are spending their rebate checks in advance and doing their best to keep the economy from sliding into recession. But will it be enough?

Joseph Vincenzino

Employment and Print

In our last posting we mentioned that jobs on nonfarm payrolls declined for the fifth straight month in May for a total drop of 324,000 thus far. Of course, a declining job count is nothing new for the manufacturing sector or the printing industry.

Data from the Bureau of Labor Statistics (BLS) show that total employment in manufacturing hasn’t shown an annual increase since 1998. And the downward trend in manufacturing jobs really started quite a bit earlier. No doubt, cyclical forces (currently in the form of an extremely weak economy) are currently intensifying the decline. Year-to-date, total manufacturing employment is down 2.2% from a year ago. A similar period in 2007 showed a decline of 1.8% and the decline in 2006 was 0.4%. What about employment in the printing industry?

As might be expected, cyclical forces also are intensifying a structural decline in print employment. Since 1998, total employment for print and related support activities is down by more than 214,000 or 26%. Production employment is down over 158,000 or almost 27%. Compared to a year ago, total and production employment in the printing industry during the January-May period are down 2.1% and 1.1%, respectively. A similar period last year showed a decline of -1.5% for total print employment, while production employment actually was up 0.2%. With sales activity weakening, printers are not only cutting employment, they’ve also cut almost a full hour off the average workweek of production employees.

Joseph Vincenzino

Labor Market: How Weak?

The Bureau of Labor Statistics (BLS) released labor market data for May. As expected we continue to lose nonfarm payroll jobs. The 49,000 loss in May was the fifth consecutive monthly decline, bringing the year-to-date drop to 324,000. The similar period a year ago witnessed a 534,000 gain. So the job market has definitely weakened along with the economy.

May’s job decline was in line with expectations. What wasn’t in line with expectations was a spike in the unemployment rate to 5.5% from 5.0% in April. Note that these data come from a different survey than payroll jobs. The May spike resulted from a surge in the labor force of 577,000 and a decline in employment of 285,000 as measured in the household survey. Year-to date, the latter is down 165,000.

The media will likely pounce on the fact this is the sharpest one-month increase for the unemployment rate in 22 years. What does this mean? Not much more than: We usually don’t see swings in the jobless rate of that magnitude. In 1986, after surging 0.5% to 7.2% in February, the unemployment rate did not get any higher the rest of the year and actually eased 0.6% by yearend. Similarly, after jumping 0.4% in April 1995 to 5.8%, the unemployment rate did not move much the rest of the year. Does that mean the unemployment rate will not move up from here? Of course it doesn’t. There is little question that the economy and job market are weak—raising unemployment to its highest level in over 3 years—and probably will get weaker. But it does mean: Lets not necessarily assume we’re falling off a cliff. We’ll discuss the latest employment data for print in our next posting.

Joseph Vincenzino

Focus on the Consumer

As expected GDP results for the first quarter were revised upward, but also as expected, the growth rate from the previous quarter remained under 1.0%—the second straight feeble increase. What are subsequent data indicating? Lets start with the consumer sector, which represents over two-thirds of GDP—71.5% to be more precise.

According to data from the Bureau of Economic Analysis, consumer spending adjusted for price changes was essentially flat in April, declining an annualized 0.1% from the previous month. Declines in purchases of both durable (-0.9%) and nondurable goods (-0.7%) were largely offset by a slight increase in services. On a year-over-year basis, consumer spending for the January to April period was up 1.8%—sharply lower than the 2.9% increase in 2007.

There is little question that the consumer sector has weakened considerably—battered by higher prices, especially at the pump and food stores, a dismal housing sector, and credit difficulties. Furthermore, during January-April, disposable (after-tax) personal income adjusted for inflation was up just 1.5% year-over-year—less than half the increase recorded in 2007. While the economy clearly is not getting much of a boost from the consumer, as of yet, the much-publicized worst-case scenarios have not materialized. So, where do we go from here? We’ll get a clue latter this week when the Federal Reserve releases data on household wealth and another big clue on Friday, when the Bureau of Labor Statistics (BLS) releases May employment data.

Joseph Vincenzino

Where Are We headed?

As we return from the unofficial kickoff of the summer season, the question many are asking: Where are gas prices and the economy going? Other than the horrific loss of life and destruction from recent natural disasters, much of the news has centered on tales about pain at the pump or how higher fuel prices are impacting all sectors of the economy. Hopefully, we took some time this Memorial Day weekend to remember all those who have defended our freedom to even worry about the economy, especially those who gave the ultimate sacrifice.

So, what is the current state of the economy? The one thing we know with certainty: It’s not strong. Recent indicators have ranged from dismal all the way up to “not good, but better than expected.” While the debate over recession/no recession continues, the number of forecasts signaling recession is on the rise. However, as we have emphasized at NAPL: Whether we slide into recession or not isn’t the key point. What is significant, especially for the commercial printing industry, is that economic activity is quite weak, being battered by a housing collapse and credit crunch. And the spike in fuel prices is not going to help.

The Bureau of Economic Analysis (BEA) will release revised GDP data for the first quarter on April 30. The data are expected to still show minimal growth—less than 1.0%—following a 0.6% gain the final quarter last year. Are we going to see any down quarters? Perhaps. The evidence is pointing in that direction. But in the midst of all the gloomy data, let’s not totally lose sight of this ray of sunshine: That the economy has managed to keep its head above water despite the significant shocks experienced is no small achievement. It can be viewed as a testament to its underlying strength—a strength that will resurface once we work our way through current difficulties.

Joseph Vincenzino