Or so pray the optimists. While few business watchers are ready to predict recession in 2001, the U.S. economy is slowing. Most financial forecasts call for slower growth in gross domestic product, more cautious consumer spending and tighter corporate budgets-putting pressure on marketers to tighten ad spending.
The drunken-sailor atmosphere of 1998 and 1999 sobered up during the second half of 2000 as the Internet bubble burst, technology stocks tumbled and the new economy faced old-fashioned layoffs and closings.
PROCESSION TO RECESSION?
There are ominous signs suggesting the economy is making a hard landing that may be the procession to recession. The Commerce Department reported third-quarter GDP slumped to 2.2% from 5.6% in the second quarter. The Conference Board's index of leading economic indicators-a predictor of economic activity for the next three to six months-has fallen seven out of the past eight months. The board's consumer confidence index fell in December for the third consecutive month.
"The continued decline in [consumers'] expectations is somewhat disconcerting," said Lynn Franco, director of the Conference Board's Consumer Research Center. "If expectations continue on this downward trend, a more severe economic slowdown may be on the horizon."
Marketers were caught flat-footed by a sharp drop in demand for goods and services in the fourth quarter as companies from La-Z-Boy to Microsoft Corp. to Time Warner warned that earnings or revenue would fall below expectations. Retailers from Federated Department Stores to Wal-Mart Stores to Zales Corp. reported holiday sales below expectations.
Yet ad industry executives-who have little incentive to pronounce doom and gloom-and most economists, who maybe have more incentive to shoot straight, were in agreement: Despite all the warning signs, they say the economy is headed for a "soft landing"--the, well, cautiously optimistic euphemism that is being used at the moment.
Morgan Stanley Dean Witter & Co.'s respected chief strategist, Byron Wien, called 2000 a "transition year" where investors were brought back to earth hard. In early December, he cautioned that high energy prices, higher unemployment claims and lower consumer confidence could be signs of tougher times to come, but he softened the blow by adding that recession worries are exaggerated. The markets are merely deflating from their unrealistic highs in 1999 and coming down to more rational levels, he said.
Still, Wall Street analysts frantically cut their estimates for 2001 GDP growth. Merrill Lynch & Co.'s chief economist, Bruce Steinberg, pared his estimate in December from 3.7% to 3.3% and also projected slower consumer spending, noting falling consumer confidence and rising unemployment. But he tempered his predictions with assertions that a recession is not coming and that inflation and unemployment rates will remain low.
That's also the consensus in the ad industry. Media execs are bracing for a tougher year, but most are at least publicly espousing a soft landing. Financial forecasts call for a tough first half of the year, with a stock market and corporate earnings recovery expected in the second half.
"If the U.S. catches a cold, then the rest of the world catches the flu," said John Perriss, chairman-CEO of Zenith Media. "The U.S. shows no signs of having a cold"-signs of faltering sales and earnings notwithstanding.
North American ad spending growth, Mr. Perriss said, will slow to 4.7% in 2001 from 8.1% in 2000. Growth will be above 5% for 2002 and 2003, he said.
According to Robert Coen, Universal McCann senior VP-director of forecasting, total U.S. advertising revenue hit $236.3 billion in 2000, a 9.8% increase. He projected spending will grow at a slower rate of 5.8% in 2001, to $250.0 billion.
In other words, Messrs. Perriss and Coen, two of the closest trackers of ad spending, both predict 2001 will be another record year for advertising, though at a slower rate of increase.
The driver for 2000's stunning results was stronger-than-expected national advertising-it rose 11.8%, boosted by hotly contested elections and the Olympic Games-while slightly disappointing local ad sales increased 6.8% over 1999. That makes for a tough apples-to-apples comparison, as Mr. Coen repeatedly warned throughout the fall.
"Spending levels are still strong for traditional advertising in 2000. We're cautiously optimistic," said Kevin Smith, exec VP-chief financial officer of True North Communications.
But signs of a slowdown became apparent in October, when marketers such as Intel Corp., Eastman Kodak and Home Depot rushed out of the gate with "earnings warnings," one of the catchphrases of the fourth quarter. Coming during the media-budgeting season, that bad news left the industry with a case of free-floating anxiety about 2001 ad expenditures.
By yearend, the television upfront advertising market had turned dark. Morgan Stanley analysts estimated 10% of upfront contracts for the first quarter of 2001 had been canceled as advertisers tightened their belts, particularly marketers in the faltering automobile and telecom categories. That rate of cancellation is double the traditional rate for the first quarter, according to the Morgan Stanley analysts.
"You can drive a truck through the TV market," said David Verklin, CEO of media buyer Carat North America.
Sellers may be more optimistic than buyers. David Poltrack, exec VP-planning and research for CBS, predicted a 7% gain in 2001 ad revenue for the four major broadcast networks and attributed the fourth quarter's noticeably soft "scatter" market to a hangover from intensive Olympic spending in September 2000.
If there ever was an indicator of the mood in the industry for the coming year, it's the UBS Warburg Media Conference-the December meeting formerly known as the PaineWebber Media Conference. The annual homecoming dance pairing media and agency execs with institutional investors had been a shoot-out-the-lights party in 1998 and 1999, as companies' pockets were bursting with dot-com cash and media buys from booming businesses.
This year's gathering was a more sober affair, as one exec after another projected slower growth in 2001. News Corp. President-Chief Operating Officer Peter Chernin said his company-which operates the Fox network and the New York Post, among other media properties-had implemented a company-wide hiring freeze. Mr. Chernin cited the ad market slowdown in late October as one reason for the action.
"We thought it was a prudent time to tighten the screws a little bit," he said. Mr. Chernin referred to ad sales as "a tough marketplace right now." For next year, he predicted double-digit ad growth would narrow.
Agency holding company chiefs used their time in front of the analysts to explain how well-positioned they are for any downshift in traditional ad spending. Pie charts often illustrated a continuing shift from traditional advertising to marketing services as a main source of revenue, and graphs also showed a growing reliance on international markets as a base for business.
Discussions of organic growth centered on marketing services. As current clients' own businesses evolve, they increasingly are looking for their agency to offer marketing services that add value, the executives said. They added they are insulated to a degree from a slackening in media spending because they have been increasingly relying on fees rather than media commissions for compensation.
To attract investors during the coming soft approach of 2001, advertising holding companies will continue to restyle their firms as something other than simply advertising.
For example, WPP Group owns agency powerhouses Ogilvy & Mather Worldwide, J. Walter Thompson Co. and Y&R Advertising, but it also has built a base of below-the-line research companies and consultancies. WPP Chief Executive Martin Sorrell has in the past described WPP as a communications company. But at the conference, he gave his company a newer spin even more detached from traditional advertising: "We are a talent company," he said. "We are in the talent business." By this, Mr. Sorrell apparently meant to underscore WPP's focus on its pool of skilled employees. But he also noted that his company expects to make investments in entertainment companies.
"He obviously sees more profitability," said a senior ad executive who attended the WPP presentation, "and better margins in other businesses besides advertising."
Michael Bungey, CEO of Bates Worldwide parent Cordiant Communications Group, bluntly noted the theme of the day. "No one wants to own up to the fact that we're in the advertising business anymore. We are," he said.
There's been no shortage of gloom and doom headlines: The Nasdaq has plummeted, and the tech sector is in a slump after years as one of the economy's main engines. Vice President-elect Dick Cheney, not wanting the incoming Bush administration to take the fall for an economic downturn, early last month warned, "We may well be on the front edge of a recession."
So is the sky falling?
Analysts say the growth is slowing and the low-hanging fruit in the tech sector has disappeared, particularly in North America. Powerhouses such as Compaq Computer Corp., Dell Computer Corp., IBM Corp. and others now will place their bets in Asia and South America, where the tech revolution is just getting under way. In North America, tech sellers will focus on growing revenue from Web integration services for large companies, though that market recently has softened.
It's time for a back-to-basics approach, according to industry observers. After years of focusing on technology and the Net, consumer staples and blue-chip stocks could be set to make a comeback in 2001. Year-end musings from Wall Street touted old-fashioned investments such as energy, retail and financial stocks.
"With the economy in slowdown, we expect more interest in defensive names," said Heather Hay Murren, Merrill Lynch's household products and personal-care analyst. Investors will look to stocks of consumer staples companies such as household products manufacturers, which faced tough times in 2000 and adjusted accordingly. For example, Procter & Gamble Co., one of Ms. Murren's picks, reorganized in 2000 to create a more efficient organization and adjusted its ad spending to a more focused approach.
Consumer staples are expected to be the backbone of the economy in 2001 because their demand has less to do with economic conditions than simple necessity. Marketers of staples such as food and package goods, confident that sales will hold up, presumably will continue their activities even if growth slows.
As one food company exec put it: "People always have to eat." In fact, a slowdown could be good news for the old-economy advertisers, whose messages won't be crowded out in the clutter of dot-com and startup messages, added the food exec.
One category that traditionally has been recession-proof and thus not expected to see an ad spending downturn is pharmaceuticals, where direct-to-consumer advertising has seen a massive year-over-year increase since the U.S. Food & Drug Administration loosened its restrictions on the ads in 1997. DTC spending in 1999 was up 40% to $1.8 billion.
"It's become such a force in the marketing plans of pharmaceutical companies that I don't think that's a place that they would cut, because most of the ads are for drugs that tend to be billion-plus-dollar drugs," said Bob Ehrlich, a CEO of DTC consulting firm Rx Insight and a former Warner-Lambert Co. executive. "When you get into that level of sales, you're not likely to cut that expenditure."
DTC also may continue its spending growth next year due to the roster of potential major drugs set to be launched. If marketers in other fields tighten their budgets, pharmaceutical companies may rush in to take advantage.
"If there's a general economic downturn, advertising rates will be cheaper, and therefore pharmaceutical companies are going to say, `Now there's an opportunity to get a lot more for our buck,' " Mr. Ehrlich said. "They may in fact pick up the slack."
If the economy crashes into recession this year, media can take a pill.
Contributing: Wendy Davis, Tobi Elkin, Jon Fine, David Goetzl, Laura Hughes, Richard Linnett, Stephanie Thompson.