• by Erik Sass  @eriksass1, May 31, 2011

This week brought grim economic news on various fronts, calling into question not only the durability of the economic recovery in general, but also the associated recovery in advertising spending that began in 2010.

However, the latest economic woes are unlikely to send advertising into the kind of nosedive that gripped the industry in 2008-2009.

The negative economic data covers a number of key areas. First and foremost, in the housing market, Standard & Poor's announced that the S&P Case-Shiller Home Price Index fell 0.8% from February-March, the eighth month-to-month drop in a row -- bringing the index to its lowest point since the second quarter of 2002.

It prompted S&P index committee chairman David M. Blitzer to remark: "Home prices continue on their downward spiral with no relief in sight." Economists and real estate experts agree that more declines are likely, now that the temporary prop provided by a popular government tax credit has been removed. The situation is made worse by the large inventory of unsold homes and homes in the process of foreclosure.

Consumer confidence also declined in the most recent measure, with the Conference Board index (measuring consumer sentiment about the next six months) dropping from 66 in April to 60.8 in May, reflecting concern over the rising cost of food and fuel along with the continuing declines in the housing market.

Economists had expected a small increase to 67; a level of 90 would be considered healthy for the economy. At the same time, the number of Americans seeking unemployment benefits rose to 424,000, exceeding the figure (375,000) associated with economic growth.

While this paints a negative picture for the near term, the effects on advertising will be harder to predict. Historically, advertising spending has tracked with the fortunes of the broader economy, with ad spending declines following (and sometimes anticipating) the negative changes in GDP.

Nonetheless, barring another broad-based decline (or "double dip") advertising is likely to basically hold steady for the rest of 2011, with forecasts trimmed by modest amounts depending on further economic developments.

The most important factor will be the length and depth of the current slowdown, and current trends suggest it will not develop into a full-fledged "double dip," according to Michael Feroli, the chief U.S. economist at JPMorgan Chase & Co., who was quoted in The New York Times as saying: "The economy has slipped into a soft patch. In the second half, we'll do better than we've been doing. As economic activity picks up, the labor market will improve as well."

Meanwhile, the Institute for Supply Management-Chicago Inc. said that its business barometer -- while weak -- was still broadly favorable. The barometer, which looks at supply chains to estimate current and future production, fell from 67.6 in April to 56.6 in May; however, it remained above the crucial level of 50, meaning the economy is still expanding, at least for the near term.

And while no one is holding their breath for a recovery in the housing market, economic conditions in other key areas are likely to ease in the second half of the year, hopefully boosting consumer spending -- which accounts for 70% of U.S. economic activity and is the most important factor affecting advertising spending.

Gas prices peaked at an average $3.99 on May 4, but are expected to come down by July, according to energy experts cited by Bloomberg Businessweek, with the U.S. Department of Energy forecasting an average summer price of $3.81.

That, in turn, should ease some of the inflationary pressure in the second half of the year. At the same time, natural disasters -- including the Japanese tsunami and destructive tornadoes in the south and Midwest -- should have less impact on economic performance as time goes on.

As noted, the big question for advertising spending is how the broader economy fares in the next six months. Historical data suggests that slow growth -- or even stagnation -- would be unlikely to cause a contraction in advertising spending.

Since 1970, ad spending has contracted on an annual basis on only a few occasions associated with major recessions -- in 1991, 2001, and 2009. During this period, slow GDP growth rates have usually translated into slower ad-spending growth, but never into negative growth rates.

Even when there were "double-dip" recessions (1973-1974 and 1980-1982), ad spending held steady or even increased during the second dip, which tended to be smaller and therefore less disruptive than the first dip.