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The economic pall that descended on the ad industry in the late '80s is finally lifting, giving agencies a new lease on life going into the second half of the '90s.

"The ad business seems to have more strength behind it and in front of it than it has since early 1985," said Alan Gottesman, an analyst at PaineWebber, New York. "The reasons for the slowdown-high interest rates, inflation, companies being taken over willy-nilly-are gone. The excesses have been wrung out of the system."

Double-digit growth by most of the agency holding companies for the second half seems to underscore an overall rebound in U.S. advertising.

Bolstering agency bottom lines and the overall U.S. ad industry is strong spending in the automotive, computer, drug and consumer package-goods sectors.

"Automobile advertising is very strong and that's one of the biggest categories," said Dean Witter Reynolds analyst James Dougherty. "They're hanging right in there, and that's an important factor in all of this."

But the long-awaited ad spending uptick is also coupled with years of massive agency streamlining, and the payout is strong second-quarter and six-month results.

"It may be too late, it may be too little, but all the agencies are in better shape than before," Mr. Dougherty said. "They're all reducing the base of fixed costs, making progress on subletting excess real estate and getting their head count down to modest levels."

Saatchi & Saatchi Co. last week announced worldwide pre-tax profits were $23.6 million for the first half of 1994, up 68% from the same period last year. The results prompted analysts to upgrade full-year forecasts for the company from roughly $45 million to about $48 million. That's a switch from the last five years when analysts only revised their Saatchi forecasts in one direction-downward.

Saatchi's first-half revenue actually declined by 1.9% to $570 million, under the impact of the late 1993 loss of Chrysler Corp. and Helene Curtis Industries business, as well as an unfavorable exchange rate and weakened dollar.

But Saatchi & Saatchi Co. Chief Executive Charles Scott said account wins at Saatchi & Saatchi Advertising and Bates Worldwide so far this year-Warner-Lambert Co., Miller Lite Ice, Compaq Computer Corp. in Europe and Qantas Airways-represent the best new business period since he joined Saatchi in 1990.

"The bright spot is our clients appear to be increasing their spending," including an average 3.5% in the first half alone, Mr. Scott said.

"There are a lot of signs that we are on our way back up from the bottom and that feeds on itself," said Robert Coen, senior VP-director of forecasting for McCann-Erickson Worldwide, who has predicted U.S. ad spending will total $148 billion this year, a 7.2% increase.

WPP Group, parent to J. Walter Thompson Co. and Ogilvy & Mather Worldwide, reported last week that pre-tax profit was up 50% to $54.3 million for the first half of the year. Revenues fell 1.3% to $1.036 billion, as a result of divestitures.

May and June were the best two consecutive months the group has experienced in the last 21/2 years, said one WPP executive. In May, O&M scored what will undoubtedly be the largest industry account win for years to come-IBM Corp.'s $500 million consolidation.

"This could be the big turnaround," Mr. Gottesman said. "Can we let our breath out? Probably. Business is better."

Foote, Cone & Belding Communications, a darling among Wall Street agency analysts, reported second-quarter net income was up 17.5% to $10.5 million. Revenues rose 8.9% from a year ago, to $102.1 million.

Among the publicly held agency groups, only Grey Advertising-the most closely held of any of the public agencies-reported net income that declined during the second quarter and first half of the year.

Grey's second-quarter net income was down 12.4% to $5.08 million compared with the same period in 1993; six-month net income dropped 8.2% to $8.3 million.

Mr. Dougherty was unable to explain Grey's decline. "There's no reason any agency should have reported bad numbers during the first half of the year," he said.

A Grey executive refused to elaborate beyond the agency's news release that attributed lower first-half results to continued softness in the European ad market, representing more than 40% of its annual commissions and fees, and the exchange rate movements.

Overall on Madison Avenue, however, there is a contagious optimism.

"This year DDB Needham U.S. will have its best year since 1986," said John Bradstock, president of DDB Needham North America, part of Omnicom Group, which earlier reported second-quarter net income that increased 23% to $33.5 million. "Clients have shown a lot more confidence in the last six months, especially in package goods, healthcare and telecommunications."

And that optimism is spreading to businesses which benefit from healthy agencies.

"I have so many job searches in house I can't see straight," said advertising recruiter Paul Gumbinner, president of Gumbinner/Haubenstock, New York. "It's been good since March; it's been better since June. In fact, it's been years since it has been this good, probably since before the mergers."

Laurel Wentz and Jeanne Whalen contributed to this story.

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