(Good) Signs of the Times

All indicators point to continued economic health and stability for the nation and package printers during 1998.

by Dan Cray

If you're having a sense of deja vu as you look at your company's bottom line this year, you're not alone. Nearly one-third of the way through 1998, economists say that with a few exceptions all economic indicators are about the same as they were last year—and that's good news.

As the nation continues in one of the most drawn-out economic expansions of the post-war era, inflation and interest rates are steady, while unemployment figures are the lowest they've been in 24 years. In 1997 inflation was 1.7 percent—the best in 11 years. The economy's growth was similarly bullish—3.9 percent, the strongest in nine years.

"All the fundamental indicators are strong, and the '97 economy was so strong it gave us some momentum rolling into this year," says Ron Davis, chief economist for the Printing Industries of America (PIA). "We're definitely on a growth path for the rest of this year, the only question mark is the end of this year and into 1999, and there's certainly nothing to indicate any kind of a slowdown."

What does it mean for me?

Indeed, with indicators so positive across the board and more than eight years of economic expansion, experts think there is a real chance this could prove to be the longest peacetime expansion in U.S. history. Already the post-war record of 92 months of overall growth, set between 1982 and 1990, has been surpassed.

What does this mean for package printers and converters?

For starters, more growth. "Packaging is certainly part of an economy that is reflecting the same good consumer sentiment," says John McDeVitt, corporate economist at 3M. "Due to the strong demand and increased capacity utilization within paper, we have seen some price increases, particularly for linerboard, which is of course reflecting how strong the economy really is."Not everything is going to mirror the '97 economy, however. While growth is expected to continue, most of that growth is forecast for the first six months, with conditions gradually cooling.

"The economy will be settling down into a more sustainable rate of growth," McDeVitt says. "We've gone from about a 3.9 percent increase in 1997 to about a 2.5 percent growth rate for this year. Due to the growth of jobs, which provides income, we're looking at fairly good consumer spending in our economy. And with wages and jobs goes consumer confidence, so we should be looking to another fairly decent year." Last year consumer spending levels were at 3.2 percent, whereas this year McDeVitt says the forecast is closer to 3 percent.

"The first half will be stronger than the second half of '98, with paper and products growing about 4 1/2 percent this year, about the same as in '97," McDeVitt says. "But the expectation right now is if we were to take the fourth quarter of '98 and look at it from an industrial production point of view, it will be about 3 percent above the fourth quarter of '97—which was close to 6 percent above the same quarter in '96. So we're definitely going to be seeing a slowing in the rate of growth—almost half of what we had in the fourth quarter of last year."

The Asian factor

Most economists feel the only real threat to the economy—and a key reason the second half is expected to slow in comparison—is the ongoing financial turmoil in Asia. That continent's troubles are expected to depress U.S. export sales and trigger increased Asian imports. The Economic Policy Institute initially forecast the crisis would eliminate more than 1 million U.S. jobs, but President Clinton's Council of Economic Advisors contends there will be no impact on employment.

However, there is some indication the crisis has actually helped stimulate the U.S. economy by increasing the flow of international money into the United States and lowering interest rates here. "We keep hearing that the turmoil in Asia will slow growth in the United States, but when you look at the employment numbers you get the idea there's still a lot of horsepower left in the economy," says Russ Labrasca, senior VP at Principal Financial Securities of Dallas. Labrasca says he is still wary, however, since the final quarter of 1997 was already well underway when the Southeast Asian economy began to unravel, meaning this is the first year in which U.S. companies have had to deal with an economy fully enveloped by that crisis.

Says PIA's Davis, "It still remains to be seen how the problems with Asia will work their way through. Certainly there will be a negative impact on the economy, but I don't think that it will be enough to swing us into recession." Davis, however, sees a more ominous side to all of the recent growth and prosperity: the fact that in the midst of it all, many companies are not growing."It's a rising tide, but we're not in an era where a rising tide lifts all ships," he says. "It's sinking a few of them, meaning that beneath the surface you've still got a lot of them that have big problems. Everything's great in terms of overall market growth, but underneath it's very competitive." Davis says he routinely sees business surveys in which a great deal of firms say their sales are up 20 percent to 30 percent, but a good many others say sales are down by the same percentage. "Maybe when you average them it's up 6 percent and it looks nice and stable," he says.

Skilled labor needed

Davis feels that aside from Asian economic woes, another area of concern will be an issue that hits as close to home for package printers as anyone: the cost pressures from a tight labor market. Most companies have already had to increase their productivity to absorb cost increases, while at the same time keeping their prices stable."They keep speeding up the treadmill, so to speak, with a 3 percent productivity increase this year and then another on top of that, and they seem to be able to handle the buildup," Davis says. "These companies are out there running pretty fast, and if you raise the bar every year you've got to keep jumping over it. As a result, there definitely seems to be a bit of cost escalation—not so much prices but wages and salaries."