State of the Industry Report: Uncertainty as opportunity in the age of Trump
It’s difficult to know where to begin Print+Promo’s 2019 State of the Industry Report. For the past two years, one man has overshadowed the political stage: Donald J. Trump. Long before the 45th president of the U.S. vowed to “Make America Great Again,” he didn’t hold back when it came to pro-business stances, something that resonated with executives across all segments, including the printing industry.
We can cull through the vast amount of attention-grabbing headlines during this time period, or analyze the promised policies that can change with a tweet from the Trump White House, but, what we’re left with right now is a new 116th Congress and a divided government, with Democrats having taken control of the U.S. House of Representatives and Republicans maintaining hold of the U.S. Senate. The chances of legislative gridlock or political posturing translating to substantive policy changes are slim. But as Warrendale, Pennsylvania’s Printing Industries of America’s (PIA), Center for Print Economics and Management and Government Affairs and Advocacy pointed out in its own 2019 State of the Industry Report, “there are bipartisan lawmaking opportunities on policy issues impacting print.”
Four of those issues include:
- The impact of tax reform
- Tariffs and trade issues
- U.S. Postal Service financial instability
- Print and promotional products industry recruitment
Signed into law on Dec. 22, 2017, H.R.1, the Tax Cuts and Jobs Act, brought with it great implications for the industry. We asked two print association economists if they felt it succeeded in delivering the economic benefit that was hoped, and their responses were mostly favorable.
“In general, the tax cuts (especially the corporate tax cuts) have had a very positive impact on the economy and print,” said Dr. Ronnie H. Davis, PIA’s senior vice president and chief economist. “I believe the impact on the economy has been to increase growth in GDP by around 0.5 percent. The impact on print has been slightly less—perhaps a boost of around 0.3 percent in printing shipments above the baseline before the cuts.”
Andrew D. Paparozzi, chief economist for Specialty Graphic Imaging Association (SGIA), Fairfax, Va., was more guarded in his optimism.
“It’s impossible to know precisely how any one factor affects the American economy because there’s no way to hold all the other factors constant,” he explained. “But, incentives matter. Increase the incentive to do something by increasing return and lower costs, and you get more of it. The reductions in personal, corporate and pass-through business taxes in the act increased the incentive to invest and hire. It’s unlikely the economy and employment would have grown as rapidly without it.”
As for whether they believed print service providers (PSPs) took advantage of tax-saving opportunities, both men said the data were limited—specifically in regard to labor-saving machinery acquisitions.
“I haven’t tried to measure it,” Paparozzi admitted. “And, tax savings alone are never enough to justify a capital investment. But, capital investments that maximize speed and efficiency are essential in the printing industry, where competition is intensifying despite ongoing consolidation. Anything that lowers the cost of those investments will help on the margin. But, again, you have to be able to justify the investment based on expected return over its life, not a one-time tax savings.”
Davis, however, attributed the combination of faster economic growth, increased print sales and tax advantages to a boost in investments in plants and equipment.
One thing is certain: There is no better predictor of 2019 trends than the direction of the overall economy. Even in spite of heightened trade tensions and the beginning of the longest government shutdown on record, the economy continues to fare well (thanks to an assist from legislation such as H.R.1), which is good news for print as forecasts are finalized.
By SGIA’s estimates, total commercial printing industry sales (all sources) for 2018 increased 1.8 percent to $85.4 billion—in line with the association’s expectations. Paparozzi clarified that this figure was 11.0 percent greater than the 2011 low, but still 13.2 percent less than the 2007 pre-Great Recession total. He forecasted growth of 1.5 percent to 2.5 percent in 2019.
“The industry continues to grow slowly and prices continue to firm,” Paparozzi remarked. “But profitability is being squeezed by a number of factors, including rising paper prices, the rising cost of health care benefits, rising wages and difficulty recruiting productive, skilled personnel due to both exceptionally tight labor markets and print’s old-economy image.”
Davis proposed similar figures for 2019, with print markets growing around 2 percent at the present time—a “very healthy pace” from a historical perspective, he noted.
This makes sense considering that print does best in a mature economic recovery phase of the business cycle. We have been in this phase for a decade now. To provide some perspective, average recoveries (post-World War II) last roughly six to seven years.
Davis did warn that the risk of recession has increased since we’ve entered the 10th year of recovery. In fact, his latest forecast put the odds of a recession in 2019 at approximately 30 percent. From PIA’s 2019 State of the Industry findings, the downside risks that could lead to slower-growth scenarios and, ultimately, a recession are:
- Trade restrictions/barriers
- Labor shortages, coupled with immigration restrictions (total number, quantity and quality, age)
- Bottlenecks, such as transportation
- Costs and price pressures
- Heightened interest rates from inflation, and increases in deficit
- Other wildcard issues
“I am generally optimistic for print in both the short and longer run,” Davis said. “In the short run, as long as the economy holds up and stays out of recession, print markets should continue to grow at a 2-percent pace.”
Tariffs and Trade Issues
As outlined in PIA’s 2019 State of the Industry Report, the Section 232 tariffs on steel and aluminum will continue to be a major issue for printers. Via the report:
Such tariffs have been used largely as a bargaining chip for larger administration trade priorities like passage of USMCA (U.S.-Mexico-Canada Agreement, aka the new NAFTA) or a deal with China. PIA members have felt the added cost impact of such tariffs, particularly aluminum imported from the EU to make lithographic printing plates. Major print equipment suppliers announced that the U.S. Department of Commerce had granted exclusion allowing for retroactive refunds of such tariffs that had been assessed as 10-percent-pass-through surcharges to many PIA members. However, such exclusions are only good for one year and not guaranteed to be renewed. Thus, uncertainty surrounding tariffs on inputs will continue.
Mark Nuzzaco, vice president of government affairs at APTech the Association for PRINT Technologies (formerly NPES), Reston, Va., told Patrick Henry, senior editor of Printing Impressions, the sister publication of Print+Promo, that there are three categories of tariffs affecting the printing industry: anti-dumping and countervailing duties imposed by the Trump administration on uncoated groundwood imported from Canada; the previously mentioned tariffs on imported aluminum and steel; and a series of duties on Chinese-made machinery, some of which have included printing equipment. “He points out that in all cases, the exporters aren’t the ones paying the penalties,” Henry wrote. “The cost burden falls on the end-users of the imported goods.
At press time, President Trump announced the country’s plans to extend the deadline for reaching a trade deal with China beyond the previously set March 1. In a series of tweets, dated Feb. 24, he wrote:
I am pleased to report that the U.S. has made substantial progress in our trade talks with China on important structural issues including intellectual property protection, technology transfer, agriculture, services, currency and many other issues. As a result of these very productive talks, I will be delaying the U.S. increase in tariffs now scheduled for March 1. Assuming both sides make additional progress, we will be planning a Summit for President Xi and myself, at Mar-a-Lago, to conclude an agreement. A very good weekend for U.S. & China!
This decision is important for the domestic promotional products industry, which imports the vast majority of items sold stateside from China. Download our complete 2019 State of the Industry Report here for our in-depth conversation with Paul Bellantone, CAE, president and CEO of Promotional Products Association International (PPAI), Irving, Texas.
U.S. Postal Service
The struggle is real for the USPS. In a recent press release, the agency disclosed a $1.5 billion net loss for the first quarter of fiscal 2019. First-Class Mail revenue, its former monopoly product, declined by $81 million, or 1.2 percent, on a volume decline of 428 million pieces, or 2.8 percent, compared to the same quarter last year.
“We continued to drive growth in our package business and expanded use of the marketing mail channel during the quarter. Nevertheless, we face ongoing financial challenges,” Postmaster General and CEO Megan J. Brennan said in a statement. “We remain focused on aggressive management of the business, legislative reform and pricing system reform, all of which are necessary to put the Postal Service on firm financial footing. Our nation is best served by a financially sustainable Postal Service that can invest in its future and meet the evolving mailing and shipping needs of the American public.”
A Postal Service reform bill that was introduced in 2017 aimed to save the USPS $10 billion over 10 years, but it lost key sponsorship and failed to advance. Then, there was the 2018 Postal Service Reform Act (S. 2629), which aimed to solve the prefunding problem by requiring postal retirees to enroll in Medicare as their primary care provider. The Postal Service reported a 2018 net loss of $3.9 billion, an increase in net loss of $1.2 billion, compared to 2017.
Will this be the year of reform? PIA noted that congressional champions of postal reform have acknowledged their willingness to restart the bipartisan, big-tent effort to pass legislation to modernize the financial operations of the USPS that failed.
Print and Promotional Products Industry Recruitment
Each year the U.S. Department of Labor’s (DOL) Bureau of Labor Statistics lists industries and jobs that become too small or concentrated to be tracked in its Current Employment Statistics database. Last month, the DOL unit removed “printer,” “screen printer” and “support activities for printing.”
Naturally, industry reaction was swift. PIA President and CEO Michael Makin expressed his dissatisfaction. Below is an excerpt from his official statement:
[PIA] is disappointed—but not surprised—to learn of the Bureau of Labor Statistics’ announcement that the agency would no longer track jobs related to commercial print, screen printing and support activities for printing. The disappointment is shared by the approximately 800,000 workers in the printing, packaging and publishing industry who go to work every morning knowing that their jobs are relevant to the nation’s manufacturing economy.
The decision certainly isn’t going to help solve the print sector’s age problem. Human resources issues (e.g., lack of skilled personnel, lack of young blood, etc.) are almost always cited as one of the industry’s biggest challenges.
“For the printing industry, the challenge isn’t simply a cyclical problem—the result of the lowest unemployment rate in 49 years—it’s also structural—an old-economy image that makes it difficult to recruit young talent,” Paparozzi said. “We have to make the case for our industry.”
The SGIA chief economist pointed to resources created by the Print and Graphics Scholarship Foundation, like “Graphic Communications as a Career,” and “Adventures in Print–Choose Your Career in Graphic Communications”—posters intended to generate interest with young people to pursue a path in print.
And, why wouldn’t they consider print? Although it’s an industry steeped in tradition, print is evolving as a media, with PSPs transitioning with a diverse and exciting mix of processes, products and ancillary services. As for growth markets, Paparozzi turned to SGIA’s Commercial Printing Panel for insight. Among those surveyed, they saw direct mail, packaging, signs/wraps/banners and displays/point-of-purchase advertising trending upward.
Davis agreed, adding labels to the list. The print sectors under considerable pressure, he said, are books, magazines/periodicals, financial/legal, business forms, stationery and loose-leaf manufacturing.
“These sectors are competing against digital substitution,” Davis observed. “However, there are still opportunities for sales growth even in these sectors as the number of providers decline and those that survive gain market share.”
A New Approach
When PSPs are positioning for the future, strategic thinking is critical—especially in a changing environment like print and promotional products. This is where diversification comes into play. In fact, members of SGIA’s Commercial Printing Panel expect “something other than printing (mailing, fulfillment, database creation, management and analysis to support customized marketing programs, etc.) to provide, on average, 25.6 percent of their revenue by 2020, up from 20.2 percent today and 16.2 percent two years ago,” Paparozzi shared.
“Fewer printers are limiting themselves to traditional products and markets or ‘that’s-not-my-business’ thinking,” he said of the ongoing trend toward convergence of print sectors. “More are taking a tell-me-more approach to that new product, service, process, market, etc. What’s it all about? It may not be a fit for my company, but I want to know more.”
That’s not to say all PSPs will blindly invest in print’s flavor of the month. If these product segments don’t fit their company’s vision, they’ll take a hard pass. Unfortunately, it’s a lesson that some panel members had to learn firsthand after entering a market that wasn’t a good fit, or failing to understand all that’s required to diversify profitably.
“As explained in the SGIA Critical Trends Report: Commercial Printing, it’s about thinking big and thinking carefully,” Paparozzi said. “Thinking big means thinking beyond how print is manufactured to how it powers communication—particularly, personalized, integrated and interactive/mobile communication. Thinking carefully means resisting the temptation to follow the crowd into that hot new market and, instead, thoroughly evaluate whether that market really is an opportunity given your company’s resources, capabilities and circumstances.”
Like what you’ve read so far? Click here for the complete 2019 State of the Industry Report, including our complete in-depth analysis, along with key insights and strategies for growth from thought leaders in the printed forms, labels, promotional products and direct mail sectors.