Economic Woes Equal Advertising Blues

Despite an expected pick up in ad spending in 2012, the financial forecast ain’t looking too good

As the industry gathers at Advertising Week to compare notes on the latest industry developments, the 500-pound gorilla overshadowing the Manhattan event will, of course, be the troubled economy.

The bottom line for marketers and advertisers? Despite a few bright spots—including robust growth in ad spending in the BRIC countries and “Next 11” emerging markets—the outlook remains uncertain.

The most current numbers come today, when ZenithOptimedia releases its latest data about ad spending at the Advertising Week Financial Forecast session at noon. The Publicis media network found marketers are still spending—but not as strongly as could be expected after an economic downturn.

Indeed, even last year’s silver lining—Western companies avoiding capital expansion and added fixed costs, and investing in brand building—has reversed course. Ad spending, according to numbers from Jon Swallen, svp, research, Kantar Media North America, which did relatively well in 2010—up 5.1 percent in Q1, 5.4 percent in the Q2, 8.7 percent in Q3, and 7 percent in Q4—is seeing a real dip, with Q1 2011 down to 4.4 percent, and Q2, 2.8 percent. Additionally, spending increases for the top 100 advertisers has stalled.

Interpublic market research unit MagnaGlobal estimated in June that U.S. ad spending will climb 4.8 percent next year, but that projection is due in part to the additional $3 billion expected to be spent on political advertising and Olympic-related marketing.

Regardless, rising commodity prices and the cost of goods have put the squeeze on marketers, who want vendors to share the pain with lower fees.

More importantly, in the U.S., where consumer spending still accounts for about 70 percent of the GDP, consumer confidence is plummeting along with the economy, and new census and government data is compounding the bad news. Last week, for instance, the Labor Department reported that in 2010 consumers earned and spent less for a second straight year. Is that a reaction to a nasty cyclical downturn or a more fundamental shift as the American middle class—the backbone of the economy—increasingly gets squeezed?

The decline in middle-class consumers, says Vincent Létang, evp, director of global forecasting at MagnaGlobal, “has really accelerated and widened in the past three years. The golden age of modern advertising was built in the ’50s and ’60s with the rise in consumption and the growing middle class. Now we’re seeing its decline which is not at all good.”

Indeed, while financial observers debate whether the U.S. is headed for a double-dip recession, Americans already act as if it’s happened.

“It’s a case of reality versus perception: There’s a real feeling that things are slowing down with increasing concern and worry about, ‘How do we [Americans] get out of this mess?’” says James Heekin, CEO, Grey Global Group. “That’s the No. 1 issue and no one has the answers.”