Economic clues seen in office cabinets, Post-Its

The Washington PostNovember 6, 2012 

— For a sense on how things are going in the nation’s service sector, take a look in your workplace’s office-supply cabinet. Two major companies’ latest financial numbers give a sense of the economic trends afoot in offices across the United States, and they’re flashing signs that no major upswing is on the way.

Although there is a wealth of measures of how things are going in the U.S. manufacturing and construction sectors (industrial production, factory orders and a wide range of housing-related data, for example), things are murkier with service businesses. It is reasonably easy to figure out that a given auto factory has the capacity to produce 20,000 cars but is only making 15,000. How, though, do you assess how much insurance an insurance company has the capacity to issue? How many real estate deals a brokerage firm can broker? How much educating a private college is capable of doing? These questions give economists who are trying to measure business activity fits.

On Monday, the Institute for Supply Management survey of non-manufacturing businesses reported slower expansion in the sector in October (the index was 54.2, down from 55.1 in September). But that is a pretty broad measure for a sector that accounts for 84 percent of U.S. private-sector jobs. To get a more granular sense of what is happening among the nation’s millions of office workers and the companies that employ them, we can look at the earnings numbers for the companies that sell them the goods they need to do their jobs, namely Office Depot and Office Max. Both reported third-quarter earnings Tuesday morning. When companies are expanding and hiring workers, they presumably need more desks, computers, business cards and pens, creating more demand at major office-supply companies. When they are in cutback mode, there is less need for new furniture and equipment, as employees get more snippy memos from the office manager about not wasting paper clips.

The numbers out of the two office-supply giants show these firms are still facing a very difficult business environment, one in which their customer base is not growing enough to overcome structural shifts that hurt sales.

Office Depot reported a 5 percent decline in sales, compared with the third quarter of 2011, and an operating profit swing, from a $19 million profit to a $55 million loss. Office Max said sales fell 1.7 percent, and operating profits fell to $33 million from $41 million. Both companies closed stores in that span.

But there’s another reason, in addition to the weak service economy, that office supply firms are struggling: the constant tech revolution. A shift in consumers’ computer preference for tablet devices instead of more expensive laptops has hurt sales (though, interestingly, helped profit margins). More and more people purchase software by downloading it rather than buying a box in a store. There is a longer-term shift toward storing information digitally, which means less demand for filing cabinets, paper and other goods that are the bread and butter of office-supply retailers.

“The economy is not giving us any tail wind,” said Ravi Saligram, chief executive of Office Max, at an investors conference in September. “I don’t see any improvement in terms of a significant level.”

In other words, the companies are not building capacity to accommodate growth. Rather, they are still matching capacity and current demand.

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