October 15, 2004 - GraphExpo Presentation - Economic Data - Managers: Be Wary of Communications Malpractice - Media Mix Change Shows in Employment Data - “That Picture” from Monday’s Presentation GraphExpo Presentation I was pleased to have the opportunity to present again this year at a special Graph Expo event hosted by WhatTheyThink and sponsored by MAN Roland. My presentation, entitled Revolutionizing the Printing Industry, is accessible here. Both slides and audio are available for download. Thanks also to all who stopped me on the show floor and mentioned reading this column. I hope I continue to live up to your expectations and surprise you with fresh perspectives on issues relevant to our industry. Back to top -------------------------------------------------------------------------------- Economic Data The general economic situation still looks good—better than reported in the press. Last week, unemployment held steady in a report that had something for all of the pundits to wail about. The bottom line is that employment is a lagging indicator, and a slow rate of growth now is more related to the slower second quarter than it is to anything going on as we start into the fourth quarter. Remember, it’s such a lagging indicator that employment actually increases at the beginning of a recession and is slow to return when growth starts again. Among the strange things in the report are that the household survey showed a decrease (yes, a decrease) in employment of more than 200,000, while the payroll survey showed an increase of 96,000, claimed by the press to be “sluggish.” The difference between the household and payroll surveys is still almost 3 million. That gap may be starting to close—the Bureau of Labor Statistics changed its baseline employment reporting to “discover” 236,000 more jobs than it had earlier been saying the economy had. And in what may be the most bullish aspect of the report, the September estimate of net new businesses was up 18% compared to September of last year. The 12-month moving average is still running at 800,000 net new businesses a year, yet no one reports this good news, anywhere. The real cause of the new business increase is reluctant big company CEOs, who are not hiring, largely because of fears of bad publicity about layoffs (if you never hire them, you never have to lay them off), high benefit costs which become a permanent part of their cost infrastructure, and a desire to build more flexibility into their companies. Therefore, hiring small businesses to perform additional needed tasks as an outsourced service makes sense. Yet government data and the entrenched bureaucracy that creates these reports still focus on measures like the payroll survey that have a poor track record of indicating small business activity. On the Web: The unemployment report Economist Gen Epstein’s employment analysis in Barron’s (subscription required) The National Federation of Independent Business survey is still bullish for small business growth I’ve watched with great interest the reporting about oil prices. An observer of this column said I was right when I said months ago that oil would go to $55. I guess I was. Oil is up because of a terrorism premium, but it’s also up because of increased demand worldwide. And it’s still true that oil prices have to reach $80 to be at truly all-time inflation-adjusted levels. Have you seen any news source reporting that oil is 31% lower than its all time high? Not a single word! Inflation adjustments are essential in putting commodity prices in perspective, and no one seems to be doing that. In addition, our consumption of oil is far more efficient than it was during the oil embargos and supply disruptions of the 1970s, so this current price increase does not hit household pocketbooks in the same ways it did then. The problem with oil prices is that no one planned for the rise, even though there were so many signs of it on the horizon. The actual price doesn’t matter; it’s what people expected and planned for that matters. That being said, there are other factors that affect the total cost of products. While oil affects transportation costs directly, the high cost of oil does not always translate into higher prices elsewhere. Increased productivity can absorb some raw materials cost, as can savings from conservation or substitutes. On a macro level, increased cost of gasoline has been blamed for reducing the number of restaurant visits. In turn, that decrease in demand for restaurant services causes restaurant prices to come down (promotions, discounts, specials) as they attempt to lure customers back. What really matters is what happens to household wealth and personal income, and both of those metrics have been good in real terms. A major reason the Fed has raised interest rates is to be sure that inflation does not come back to negate the economic improvements we have seen. Because of increased demand for oil in non-U.S. countries, this time the Fed’s actions have a lesser impact on oil prices here in the U.S. I don’t expect those prices to come down anytime soon. The oil market is nervous, responding to events that would normally be shrugged off. Nigerian rebels shutting down their country’s production for a few days? Yawn. Explosion at a Mexican plant? ZZZZZ. Suspicious Venezuelan elections? Nighty-night. When world prices jump for these reasons, you know demand is outstripping ability to fill it. Back to top -------------------------------------------------------------------------------- Managers: Be Wary of Communications Malpractice Economist Larry Kudlow, in an opinion piece in the Wall Street Journal, delineated the state of the economy, with statistics that remain largely unreported in the business press: inflation-adjusted consumer spending is up 3.6%, residential housing investment is up 13.2%, capital-goods investment by businesses is up 13.9%, spending on machine tools for heavy-industry manufacturing is up a whopping 54.2%, exports and imports are up nearly 11%, after-tax corporate profits are up 19.5%, industrial production is up 5.2%, high-tech production is up 23.7%, productivity has reached an astonishing 4.6% rate, household wealth is up 11.1%, hitting a record high of $45.9 trillion, the GDP deflator is up only 2.2%, (this is an inflation measure that some economists prefer, rather than using the CPI) the core consumer-spending deflator (excluding food and energy) is up only 1.4%, (another inflation measure) interest rates are at 45-year lows, with short-term rates at less than 2%, 15-year mortgage rates are just above 5%, and home ownership stands at a record 69.2%. Sounds like a great turnaround to me. In the piece, Kudlow blames the media for the perception that the turnaround is not real. While media reporting of economics is often quite shallow, in my mind it's the White House that has bungled the reporting of the state of the economy. This leads to a lesson for CEOs and other managers: When there is good news, report it. When there is bad news, report it. Clearly. I once worked for a privately-held company that went through some spectacular times. (I joined after those years had passed; I never had good timing with jobs.) Eventually things turned negative (please, no comments that the downturn was suspiciously concurrent with my arrival). During the glory years, the family kept details of the company's finances "private." When the company's fortunes soured, it was only then that they started to report financial data. The employees were not conditioned to understand what the data meant or how to respond to it, other than skeptically. It is here that the lesson for CEOs is most important. Most of the metrics that Kudlow listed in his article are esoteric economic measures. The job of CEOs and executives is to find ways to communicate financial results clearly and concisely—and regularly—so people know how to interpret and react to them. And they must do so often so results are interpreted in the proper context. Everyone understands "jobs," but few people really know how to create them. Even those job creators are confused about the economy because they're too busy working to be economists. The communications malpractice that sustains the confusion retards economic growth. Don't let communications malpractice happen in your company. When there is good news, report it. When there is bad news, report it. Clearly. On the Web (subscription required): Back to top -------------------------------------------------------------------------------- Media Mix Change Shows in Employment Data The biggest areas of growth in media spending have been in event promotions and product placement. While the Internet gets a lot of press, there has been job growth in nearly all media creation areas; but public relations, most often responsible for creating and managing events and other non-advertising promotions, has grown the most. Part of this is a result of disillusionment with the measurability and staying power of advertising. Communicators want to find unique ways to reach their audiences, and PR has been a lower-cost—and often more effective—way to reach communications goals. Note also the increase in employment by graphic design businesses. These shops have been empowered by advances in software and telecommunications and have taken away much of the work formerly perfomed by small advertising agencies as they, too, become important players in the non-advertising communications market. Back to top -------------------------------------------------------------------------------- “That Picture” from Monday’s Presentation I kicked off my presentation with a picture from my Agfa days that I had also referenced in my column last year. It’s not in the “official” PDF presentation file. During the show, I bumped into a few people familiar with my short time at Agfa. It turns out that tomorrow, October 16, is the twenty-fifth anniversary of the picture, taken on the front steps of Agfa’s U.S. headquarters in Teterboro, NJ. You can see it on a secret page of my Web site (you must go directly to the address at the bottom of this segment; it can’t be accessed any other way). The page has some background about Agfa at that time. Interestingly, four months after this picture, silver would reach $52 per ounce (gold was over $800), throwing the photographic film market into turmoil. We were hand-calculating prices weekly, it seemed, for all films, having had price increases of 15%, 35%, and 50% in rapid monthly succession. I suspect this experience is what makes me numb to today’s oil price fluctuations. Silver prices in today’s dollars would be about $120 per ounce. Yet, prices at those levels would have virtually no effect on today’s printing business. (Gold, an ingredient in computer board production, would, but it is used in such minute quantities that we wouldn’t notice). Nearly everything is bits and bytes, and silver-based film is working its way to becoming a nostalgic memory. An executive in an internal meeting in 1979 said, “Film is here to stay, despite these changes. The cost of saving the amount of data needed to produce a printing plate using computer storage is incredibly expensive.” It definitely was. As an indicator of how much things have changed, here’s a personal note. For almost thirty years I have collected radio programs aired from the 1930s to the 1960s on reel-to-reel tape. I had, at one time, 1,500 reels, each weighing about a pound, and each storing five to six hours of recordings. They took up a lot of space. In mp3 format, these recordings do not even fill a 160GB hard drive, weighing perhaps two pounds or so. The reels are now gone from the shelves, and I had trouble finding someone to take them from me. Recording tape was made using polyester and various other oil-based chemicals and metals, all subject to the swings of the commodity markets. This is yet another example of how things change; like photographic film, recording tape is used so little today that price changes that once would have been devastating would not even cause a ripple. On the Web