"Interestingly, advertising growth seems to be tracking real [gross domestic product] growth instead of nominal GDP growth, as it did in the past plus some," writes Merrill Lynch ad industry analyst Lauren Rich Fine in a report released early this morning. "This supports our belief that media no longer enjoys the benefit of above average rate inflation, rather the opposite where increased competition & measurement is putting pressure on rates."

Fine and her team don't go on to explain why advertising price inflation is beginning to trail the overall expansion in the economy, but it is something other industry analysts have begun to pick up on. Steven Fredericks, president of TNS Media Intelligence, said the competitive ad tracking firm was beginning to observe a similar pattern when it issued its last forecast in June.

The shifting relationship between ad industry expansion and overall economic growth is significant, because the correlation historically has been used as component of forecasting future advertising growth.

Neither Merrill Lynch nor TNS have explained why this is happening, but other economists, including GroupM Futures Director Adam Smith have suggested that at least part of the change may be due to the increasing efficiencies of digital media, which may be taking pressure off overall media inflation, especially in the traditional media, as marketers begin shifting budgets to lower priced online inventory.

In fact, ML described the Internet as "the bright spot" within its downgraded overall advertising outlook. "A strong first half has helped buoy growth for this medium this year with acceleration in certain online formats such as branded and classifieds," the Wall Street analysts report, noting that "the law of large Numbers" is starting to impact advertisers' budget allocations towards the Internet. There are "some indications that advertisers are putting some money towards new digital initiatives (i.e., mobile advertising, games, video on demand) rather than just online," says the firm, which also issued a separate report this morning suggesting that the online ad marketplace faces a number of key topics including a "softening revenue environment (at least for Yahoo!), branded versus search outlook, product improvements including the Panama and Vista launches, increasing capital intensity, trends in social networking and industry consolidation."

The dark spots, according to Merrill Lynch, include traditional media such as newspapers, which have not benefited from banner political year spending in its electronic counterparts.

"We had recently lowered our newspaper forecast from 1.2 percent to flat growth in fiscal year 2006 and 1.1 percent to down 1.5 percent in fiscal year 2007, causing much of the reduction in our ad forecast," says Fine, adding that cable TV ad sales also have been "weak," but both broadcast and cable scatter markets "seem stronger now."

In terms of overall U.S. ad spending, Merrill Lynch now expects it to grow 4.7 percent during 2006, down from 5.1 percent in its last forecast. The global ad market now is expected to rise only 4.3 percent vs. 4.9 percent in its last outlook.

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