The Current State of the Economy: What Do You Need to Know?

The economy is top of mind for most people right now, with new numbers flashing in front of our eyes every day, with differing opinions on what they mean and how they will impact us. Even more important — how will these numbers impact your printing business, specifically? It’s not enough to look at the broad economic picture, you need to know how it affects our industry.

According to the PRINTING United Alliance annual State of the Industry Report, sponsored by Canon U.S.A. Inc., published in June 2023, the picture isn’t fantastic, but it’s not quite as bad an outlook at it could be. The report found that sales for the last quarter examined had grown just 2.9%, but when adjusted for inflation, they declined 2%. That is down rather sharply from the double-digit gains we saw in 2022 as the industry rebounded from the pandemic. 

Speaking of inflation, the report did find that it has moderated somewhat, averaging just 6.4% in the beginning of the year, compared to the 11.1% we saw last year. Price increases have also slowed to just 5.5%, compared to 11.4% last year. Much of that decrease comes from the supply chain finally starting to stabilize. That said, the report did find that printers are starting to run into far more resistance to price increases, across the board. Where many were willing to accept increases last year, as everyone was facing the same problems, now the need to protect margins is driving them to push back and look for other options rather than accept further increases.

Putting these numbers into perspective, Andy Paparozzi, chief economist for PRINTING United Alliance, notes that, “Sales growth will continue to slow and, while moderating, operating cost inflation — particularly employee compensation — will continue to run hot, creating a classic profit squeeze. Just 34.6% of participants to date in the current PRINTING United Alliance State of the Industry Survey report pre-tax profitability increased during the first half of 2023, while 46.9% report profitability declined. That’s very different from full-year 2022, when pre-tax profitability increased for 54.7% and decreased for just 27.4%.”

But inflation and pricing aren’t the only factors that will impact your business in the coming months. Paparozzi says labor, in particular, will continue to be a challenge for printers on several fronts, with all three of the biggest trends he will closely monitor for the rest of the year all related to this area. He notes:

“First, the relationship between productivity (output per hour) and employee compensation per hour will be a big trend to watch. Solid gains in employee compensation are not the problem — you don’t grow an economy by impoverishing people. Compensation rising significantly faster than productivity, as it did throughout 2022 and early 2023, is the problem because it creates sticky inflation, squeezes profitability, and dampens economic growth. A meaningful rebound in productivity would promote noninflationary economic growth by boosting compensation and profitability alike.

“Second, nonfarm employment, real (inflation-adjusted) disposable income, and hours worked by production and nonsupervisory employees is worth watching because they drive consumer spending, which accounts for approximately 70% of GDP. Additionally, hours worked is a leading indicator of labor market conditions because employers adjust hours well before employment.

“Third, we will be watching labor force participation overall, particularly among 25-to-54-year-olds, which makes up the core of the labor force. As labor force participation increases, labor shortages ease and pressure on wages, prices, and profitability moderate.”

“The economy is still creating jobs but at a significantly slower rate: 187,000 private jobs were added in July, down from 217,000 in April and 472,000 in January,” Paparozzi says of the findings, and why he’s watching them so carefully. “Additionally, the average workweek of production and nonsupervisory employees — which as noted earlier is a key indicator of future labor market conditions — slipped to 33.8 hours in July from 34.1 hours in January.”

A few other key findings are worth noting:

• The market’s panel participants are expecting to see growth in 2023 and 2024 to include in-person events, healthcare providers, education, and medical/pharmaceutical manufacturing. Markets expected to be the weakest include ad agencies and interest-rate sensitive industries such as real estate.
• Rising labor costs (58.9%), maintaining profitability (55.7%), and increasing sales (53.9%) are the most frequently cited concerns as we close out 2023. In contrast, just 33.2% of companies surveyed are very concerned about rising substrate costs, and just 15.3% about material shortages, down from 85.6% and 92.3%, respectively, at the height of the supply chain crisis.
• More than 70% of companies surveyed report that credit conditions are tightening or that they expect them to tighten later this year; nearly 80% report resistance to price increases is growing or that they expect it to later this year; and nearly 90% are seeing signs of economic slowdown/recession or expect to later this year.

And these aren’t just the trends that will impact your business for the rest of 2023, Paparozzi notes. “The trends mentioned here will be just as important to the economy’s performance next year as they have been this year.”

Highlights and Challenges Ahead

When thinking about the biggest challenges ahead — the things keeping him up at night right now — Paparozzi’s biggest concern is that “the Federal Reserve Board has raised interest rates too aggressively. Changes in interest rates can take 12 months or longer to work through the economy, so we are just beginning to see the effects of the increases initiated in March 2022. I’m concerned that the Fed waited too long to begin raising interest rates, and is now playing catch-up, increasing the odds of a policy error that pushes the economy into recession.”

That said, it’s not all proverbial doom and gloom — there are a few high spots in the numbers that are worth mentioning. 

“Productivity of nonfarm businesses rose 1.3% over year-earlier levels during the second quarter of 2023 after declining an average of 1.5% per quarter during the previous five quarters,” Paparozzi says. “Real disposable income increased during both the first and second quarters of 2023, after declining in the previous seven quarters. And the labor force participation rate of 25-to-54-year-olds rose to 83.4% in July, from 82.4% one year earlier and 81.9% two years earlier. All are very encouraging.

“I’m also encouraged by how members of the PRINTING United Alliance State of the Industry Panel are responding to the slowdown,” he continues. “They know it will be significant — whether it degenerates into a full-fledged recession or not — and will create opportunity to capture market share and talent from competitors who deny, delay, and retreat into survival mode. One member effectively captures the consensus: ‘We are very concerned about recession, but it is suicide to manage scared.’”

The PRINTING United Alliance annual State of the Industry Report, sponsored by Canon U.S.A. Inc., is released quarterly, and is a great way to keep your pulse on not only the broad economic factors impacting the country and the world, but a breakdown on how those factors specifically impact the print and graphics industry. The report is free for all Alliance members, along with a host of other industry-specific research and commentary that can’t be found anywhere else.