The Impact of Recessions on Publishing Industries, Part I

December 16, 2018

The upside of predicting a downturn in the economy is that eventually you’ll be right. The downside is that while the party’s still in full swing you’re just the grouchy guy in the corner, scowling at the other guests.

I’ve been calling for the current stock market sell-off for a couple of years now, and if you’d listened to me you would have missed out on at least a 20% plus gain in your investment portfolio. But this market “correction” is surely overdue: there’s only so long that people are willing to pay $225/share for a company that makes overpriced cameras masking as smartphones (or is it overpriced smartphones pretending to be cameras?) before somebody blinks, or some bad news pops. Apple shares are down 30% from their recent October peak; the much-lauded trillion-dollar-plus company is now worth roughly $800 billion.

So are stocks a bargain right now, or, if you sell this week could you be protecting yourself from a further drop of 10 or 20 or 30 per cent? It’s your call.

The stock market isn’t necessarily a proxy for the broader economy. Stock markets often move independently of other economic trends. It just that the current market swings are the broadest we’ve seen in a while, which got me thinking about where the economy is headed. At what point does the economy blink the way the stock market is blinking? In other words, when does the broader economy return to a recessionary state, last seen a decade ago, and how will that impact the publishing industries that I follow on this blog.

Yesterday Today?

I’ve been re-reading Frederick Lewis Allen’s excellent Only Yesterday: An Informal History of the 1920s. Published in 1931, just after the events described, Allen’s insightful book reads as if he had the benefit of  years of highsight in preparing his account of a decade “when dizzying highs were quickly succeeded by heartbreaking lows.” In this decade some 90 years later we’ve been enjoying the dizzying highs. How much heartbreak are we facing in the next round of lows? Or maybe things will be OK; it could be just a blip. Maybe this time it’s different.

Warning Signs

Call me a contrarian: I collect bad reviews of the economy. I’ve got a folder called “Next Recession” nested in a broader basket I call “Current Economics.” Fifty clippings are contained within, with titles like “Another Economic Downturn is Just a Matter of Time” and “Here’s What Could Make the Next Global Recession Even Worse.” Many date back to mid-2017. Those are nearly all optimistic, stating that a recession is nowhere in sight. In early 2018 the forecasts remained sanguine, most predicting that we’re in the clear at least into 2020. In a May economist roundup by the Wall Street Journal the consensus was also 2020, with nearly a quarter of the group looking out to 2021. John Mauldin’s May survey of “seven smart market thinkers” suggested less optimism, with an average prediction for recession in the second half of 2019. But an October article on CNN puts the recession two years out, to the summer of 2020.

The Duke University/CFO Global Business Outlook December survey of the folks holding the corporate purse-strings tallied half of CFOs expecting a recession by end of next year. Of course predictions like this can be self-fulfilling: as Peter Boockvar points out, “While the CFO’s surveyed could be very wrong in their predictions, for the sole reason that they think there is a good chance of recession coming, they will act accordingly, aka, more conservatively.”

A FoxBusiness story published yesterday is headlined “Why the US economy will likely fall into a recession next year.” It features an interview with the chief investment strategist at Charles Schwab who actually doesn’t think we face an economic recession next year.

So there you have it. The next recession is due some time next year or the year after that or maybe in 2021.

It’s your call.

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Why am I bothering with this exercise in recession-mongering? Here’s my use case: even if the next downturn is two years away, publishers should be putting contingency plans in place now. Things could get ugly.

In the next blog entry I’ll look at the historic impact of recessions on the varied publishing industries. Recession-proof? We’ll see.

 

Some additional recession-related predictions/analysis published after this blog post:

  • The chance of recession in the next 12 months rose to 23 percent in the CNBC Fed Survey (CNBC).
  • How Close are We to The Start of the Next Recession? (Seeking Alpha)
  • Next US recession will be ‘much worse’ than the last: Euro Pacific Capital CEO Peter Schiff (FOXBusiness).
  • Why are markets falling, and are we heading for global recession? (The Guardian).
  • As Markets Tumble, Tech Stocks Hit a Rare and Ominous Milestone (New York Times)
    • Several important points in this article:
      1. “The tech-heavy Nasdaq… has officially entered a bear market.”
      2. “Bear markets in stocks are rare but have the power to spread gloom through the economy.”
      3. “The stock market is still well above where it was even at the start of 2017.”
  • Bloomberg, December 30: “U.S. Stocks End Worst Year Since Financial Crisis.” But there’s been a solid bounceback in the last week. Could this be (using my all-time favorite stock market term) a Dead Cat Bounce?
  • January 3: Apple shares slide after iPhone maker issues rare revenue warning (Reuters).
  • January 3: Chinese Consumers’ Confidence Sags, Casting a Pall Over the Global Economy (NYT)
  • January 3: Delta Spurs Plunge Among Airlines After Cut to Revenue Forecast (Bloomberg).
  • January 4: A generally optimistic forecast from the World Economic Forum.
  • January 5: A very good overview from The EconomistWhoosh: What the market turmoil means for 2019
  • January 7: The Wall Street Journal thinks “Signs Point to Strong January for Stocks”  while
  • January 8: The Guardian reports “Analysts: Recession risks have increased” with one analyst suggesting that “The German economy has likely hit a (technical) recession.”
  • January 10: The Wall Street Journal again: Economists See U.S. Recession Risk Rising.

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Economics and the Future of Publishing

October 9, 2008

I read the news today, oh boy! A little less gloomy than earlier in the week, but another barrage of depressing madness. I found an article from a couple of days ago in The New York Times by Vikas Bajaj titled “Forget Logic; Fear Appears to Have Edge.” It begins: “The technical term for it is ‘negative feedback loop.’ The rest of us just call it a panic.” Yep, panic. As I write this the Dow, S&P and NASDAQ indices are all down between 35% and 38% from their 52-week highs.

In today’s Wall Street Journal there are several interesting items.

The first is titled “Housing Pain Gauge: Nearly 1 in 6 Owners ‘Under Water’,” meaning that nearly one in six U.S. homeowners owe more on a mortgage than the home is worth. Not good news. Authors James Hagerty and Ruth Simon generously state for us the obvious: “No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.”

Another one which really caught my eye is an article by Susan Carey and Paulo Prada called “Economy Takes Toll on Premium Airline Passengers.” Apparently British Airways first- and business-class traffic fell nearly 9% in September from a year earlier. This is far more serious than it may appear on the surface as, for example, Northwest Airlines admits that its elite frequent-flier members account for only 5% of its total passengers yet a full 25% of its revenue (we always suspected that’s why we get treated like bovines in cattle-class).

Which brings us to trying to get a handle on what the impact will be of the current economic crisis on the various publishing industries.

There needs first of all to be a division between advertising-supported media (primarily newspapers, magazines, radio and television) and non-advertising-supported media (primarily books, musical and visual recordings, and films exhibited in theaters).

I’ve often wondered what would be happening today to advertising-supported media if the economy weren’t in such a mess. How different would be the decline in ad dollars for newspapers, magazines, television and the like if we were in a booming economy? But sadly we appear to be heading into one of the worst economic messes since the 1930s, and as the articles referenced above make clear, the spill-over effect is strongly pronounced, in both obvious and unexpected ways.

Suffice it to say that if things were looking bad for newspapers over the summer, they’re looking ghastly today.

The traditional view of books, film, live entertainment and so on has been that they are relatively recession-proof, first of all because their unit cost has not traditionally been very high, and secondly based on the notion that even in a recession people need some form of recreation and amusement.

There’s a lot of research to be done to form a definitive case on this topic, but here are some datapoints. A 2003 article in Publishing Trends, quoting Bowker statistics, has good news and bad news about book pricing. Adjusted for inflation, hardcover fiction prices have sunk by 2% over the past 25 years, while nonfiction hardcovers dropped by 27%. On the other hand mass-market paperback prices have shot up by nearly 40% and juvenile titles soared by some 60%.

The article goes on to quote a 2002 Salon.com piece by Christopher Dreher. “…what’s taken a huge bite out of America’s book budget is the rise of the trade paperback, those larger paperbacks of better quality that can now be found occupying prime real estate on tables at the front of bookstores. Since the 1980s, publishers have increasingly kept their backlist in trade paperback, and used this format to publish the paperback versions of books that don’t have a mass-market appeal or million-copy sales potential, such as more-literary or specialized titles,” Dreher writes. This format usually retails for 3 or 4 times what the equivalent mass-market paperback might, and can drive away cost-conscious buyers.

A January, 2008 entry on FuturePerfectPublishing.com quotes data from an August 2006 study by the Bureau of Economic Analysis and concludes that during the 2001 recession “growth in books sales actually remained positive and then rebounded quickly to their historic growth rate.”

The study is actually an NEA study which quotes data from the U.S. Bureau of Economic Analysis. When you examine the whole chart a slightly different perspective emerges.

Recession_data.jpg

Yes, book sales did continue to grow and bounce back quickly. But “Recreation consumption spending” as a whole far outperformed books, as did “Nondurable toys & sport supplies” and “Video & audio goods.” Watch out flower shops: “Flowers, seeds, & potted plants” took the biggest hit in 2001!

However the book publishing industry did even better during the recession of 1991, as data from the noted industry statistician William S. Lofquist authoritatively demonstrates.

The book publishing industry is today a substantially different beast than it was in 1991 or even in 2001. New books can be found at a discount by everyone as a result of Amazon, Barnes & Noble and others. Used books are far more easily sourced than ever before, and the lowest prices discovered, through both Amazon and Barnes & Noble, and from more specialized online sellers like alibris.com. Audiobook sales had been exploding (although they’re down by nearly 27% this year — perhaps falling victim to podcasts).Even e-book sales seem finally to be gaining some traction (at prices generally lower than comparable paper versions).

As I was writing this entry today the Association of American Publishers (AAP) issued a press release stating that “Book sales tracked by the Association of American Publishers (AAP) …were down by 1.4 percent for the year.” Two comments. 1.4 percent is not much when you think about the calamity that we call the U.S. economy, and as I demonstrate in my article on book publishing, the AAP data misses a tremendous amount of publishing sales volume that takes place outside of the larger publishing houses.

Meanwhile, over on Bill Conerly’s Businomics Blog, an August 7th entry discusses a Wall Street Journal article and makes the observation:

“Hollywood has said that it’s recession proof, because in hard times people will seek escape from their worries by going to the movies. The Wall Street Journal (subscription required) reports a new study that found just the opposite — when times are tough, people skip the movie-popcorn-soda expense. Perhaps they watch a movie on broadcast television, or rent a DVD for a couple of bucks. So far this year, box office sales are down 3.27% from last year.”

The original article in the Wall Street Journal is a good read, with more data and insight. Author Lauren Schuker interviews Hal Vogel, a longtime media analyst (whose “Entertainment Industry Economics: A Guide for Financial Analysis” I reference frequently). Vogel points out that “‘the availability of …alternative forms of entertainment means that today’s economic slowdown could have more of a negative impact on the film business than previous times of economic turbulence.

“‘You can’t compare how this slowdown might affect the movie industry to previous recessions,'” says Mr. Vogel. “‘The industry still has a degree of recession resistance, but this time around there is all this new technology and all these new distractions for moviegoers — you didn’t have Web episodes and cable television and computer games coming out of your ears in the past.'”

I think that this point, as much as any other, will be a key factor why most forms of publishing are going to suffer worse through this recession than they have through any other.

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