Are Signals Ahead Flashing Yellow?

By Andrew Paparozzi
In March 29, 2011

One of the bright spots of the ongoing economic recovery has been business investment in equipment and software—up an inflation-adjusted 15.3% in 2010, while overall gross domestic product (GDP) rose 2.9% for the year. Positive developments in the business sector were also reflected in a vastly improved bottom line. Corporate profits from current production jumped more than 29.0% in 2010, following three years of declines. For the year, profits as a percent of GDP rose to 11.1%—up from an average of 8.8% in the previous two years. However, in relation to the economy, profits are still below the 12.0% mark recorded in 2006. While much of the recent gains reflect profits in the financial sector, profits for this sector were more than 14.0% below 2006 levels. And despite a 72.0% jump in manufacturing profits in 2010, levels remain 14.7% below 2006. Although the economy has regained its previous peak, in terms of profits—we haven’t come all the way back. And there are indications that gaining ground from here will be getting more difficult. In other words: The low hanging fruit may have already been picked. 

Among some of the signs pointing to potential difficulties going forward: Profits only grew at an annualized 9.6% clip in the final quarter of 2010, and the increase was entirely accounted for by a 78.9% surge among financial companies. Profits for nonfinancial companies actually declined at a 4.5% pace in the fourth quarter, and among nonfinancials, manufacturing slipped by 35.2%. Of course, one-quarter does not a trend make. But declines in profits among nonfinancials in general and manufacturing in particular for the second half of the year could be pointing to potential roadblocks ahead. Especially when one considers what’s happening to the cost of doing business. Cost inflation can be a problem and, when margins are tight and prospects of pricing power slim, it could be a serious problem. Commodity prices have been rising for some time and cost inflation should not be coming as a surprise to our readers, but it took a spike in gasoline prices to shine a spotlight on the issue. As reported in the May 2010 NAPLPrinting Business Conditions, more than 80.0% of our research participants were concerned that cost inflation would squeeze already thin margins. Almost one-in-four were extremely concerned. Given that, if anything, cost inflation has intensified, we suspect that the concern has not abated. 

Our inaugural issue of the NAPL Quick and Small Commercial Printers Trends Reportshows that of the printers surveyed in this segment almost 40.0% expect costs to rise over the next six months, while less than 10.0% expect costs to decline. (For information on other trends and issues in this segment see the March 24 post in the State of the Industry section of Performance Indicators website.) Getting top-line growth to the bottom line can be challenging. In an industry that’s being redefined and at the same time experiencing aspects of commoditization, the challenge can be significantly more intense. Protecting the bottom line and what companies are doing to pass some of these cost increases along will be overarching themes of future research. 

Andrew Paparozzi        Joseph Vincenzino

Andrew Paparozzi

Epicomm's Andrew Paparozzi, Vice President/Chief Economist, is well-known for his accurate and thoughtful discussions on the economy and US commercial printing industry. A foremost author and speaker on economic business trends in the printing industry, Paparozzi heads Epicomm's Printing Economic Research Center.

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