Yesterday, Merrill Lynch analyst Lauren Fine lowered her 2006 and 2007 forecasts for U.S. advertising. Lauren has been ahead of the curve this year with below consensus forecasts for advertising growth so this is a call worth paying attention to, particularly for 2007.
Based upon Merrill’s forecast for nominal GDP growth of 4.5% and real GDP growth of 1.8%, Lauren is now calling for 2007 U.S. advertising of $298 billion, a gain of 2.8% vs. her prior forecast for a gain of 3.5%. Lauren lowered her forecasted growth for all the major traditional media categories but slightly raised her estimate for internet advertising growth.
In fact, excluding the $3 billion, or 22% gain for internet advertising, Lauren’s estimate for 2007 U.S advertising growth would be just 1.8%. Internet advertising represents $3 billion of the projected $8 billion gain for total advertising, or 41% of the incremental growth….

Looking at the traditional advertising media, Lauren lowered her forecast for newspapers to -1.5% from a prior forecast of 1.1%. I think this is the low estimate on the street. It also includes online classifieds so the negative growth in print advertising is even larger.
For broadcast TV, Lauren’s estimate is for growth of -1.2% pulled down by fact that 2007 is not a political year. Cable TV ad growth will be the healthiest among traditional media sectors at a gain of 5.8%. Nevertheless, this forecast is lowered from a previous estimate of 7.2%.
Radio and Magazines are each projected to grow by 1% in 2007, down from previous estimates of 2.2% and 2%, respectively.
Historically, advertising has been a cyclical growth industry, tracking nominal GDP when economic growth is rising. The current ad cycle has seen traditional media advertising track well below nominal GDP largely as a result of share loss to the internet. In turn, traditional advertising has suffered a loss of pricing power.
Right now, with the stock market apparently buying into a soft landing scenario, lowered advertising forecasts have little impact on media stocks. However, if Lauren’s below consensus view proves accurate and investors begin to fear a hard landing, the ramifications for media stock performance could become significant.
At a minimum, what appears to be a structural slowdown in advertising growth for traditional media should keep the pressure on public and private multiples of media stocks, rendering historical valuation levels irrelevant and sustaining the secular headwinds faced by the sector.