A Deeper Funk

T he shock waves from the horror of Sept. 11 are all but certainly pushing the U.S. economy into recession. The advertising industry, which has been steadily relearning its economic-adversity coping skills—rusty from 10 years of non-use—may be facing business conditions even worse than the dire scenarios pessimists were warning about a mere few weeks ago.

The slowdown first began nine months ago when one of the fuel lines powering the economy clogged. Non-residential investments (an important category that covers capital spending by businesses) stopped growing in the first quarter and shrank by around 2 percent in the second, and the slide continued in the third, we’ll likely soon dis cover. In particular, businesses were not investing in themselves.

But under the law of economics that says “Up is better than down,” we weren’t in a recession. Most measures of consumption continued to plod forward (though off the pace set in late 1999). That is important, because personal consumption spending, which was growing, accounts for around 70 percent of economic activity, while the investment segment, which was declining, accounts for less than 20 percent. The strength in the bigger category more than offset the weakness in the smaller one, allowing the GDP—which includes both—to post gains.

What’s different now is that we’re seeing changes in consumer behavior. The immediate shifts have been felt only in a few areas, such as the travel-related industries, but if consumer enthusiasm dampens further, other sectors will soon be sandbagged.

The ad industry was in a funk to begin with. As businesses reined in spending earlier this year, companies affected by the pullback looked for ways to trim expenses, and ad budgets were an easy solution. It’s not a solution for the long run, but that’s not the point for a manager out to salvage next quarter’s earnings.

The first round of ad-spending cutbacks started the spiral effect peculiar to the ad industry, wherein lower ad rates (prompted by re duced demand) tend to stifle, not stimulate, demand. (In most cases, of course, when merchandise is on “Sale!” customers run into the store, not out.)

Now we’re facing something far more dangerous. If consumer spending does start to shrink, advertisers will find it far easier, and more obviously necessary, to slash ad budgets. There’s not a lot of point in pitching to people who have withdrawn from the marketplace.

The impact on the agency sector would be as ugly as it is obvious. In a business where 60 percent of revenue goes back out through the payroll department, there are not many areas besides staffing in which to cut costs.

While there’s really no good news to any of this, there are two optimistic points to be made. Consumers’ initial reactions—which were sudden, severe and instinctive—may not last long. Don’t count the consumer out just yet. As well, the ad industry is stronger financially than it was before the last economic reversal, and it not only withstood that one, it emerged stronger than ever.