• by Joe Mandese  @mp_joemandese, December 2, 2005

On the cusp of a week of major Wall Street advertising and media outlooks, an influential Wall Street player has revised her outlook for U.S. ad spending downward once again. In a research note issued early Thursday morning, Merrill Lynch securities analyst Lauren Rich Fine lowered the firm's 2005 U.S. ad spending growth estimates to 3.2 percent from its previous forecast of 3.7 percent. Merrill Lynch's 2006 outlook has been revised down to a U.S. ad growth rate of 4.5 percent from a previous forecast of 5.2 percent. The longer-term outlook is especially devastating, since it reflects a year that should provide a boon from Olympics and election spending.

If direct mail is factored out of Merrill Lynch's estimates, the firm's ad growth rate for the major media in 2005 is even lower: just 2.3 percent.

Merrill Lynch's revisions come as major media--with the exception of online and outdoor--are reporting increasingly downward results as the year progresses. The radio industry, for example, disclosed its worst ad revenue month to date for October, according to results released Wednesday (see related item in today's MediaDailyNews).

The biggest media hits in Fine's revised forecast impact the TV business. Broadcast TV ad spending is now projected to decline at nearly twice the rate previously anticipated by Merrill Lynch: 6.1 percent versus an early forecast of 3.8 percent. The main culprit is the major broadcast networks, which are now expected to take a 5.0 percent hit on 2005 advertising sales versus an early prediction of a 1.2 percent increase over 2004. Cable TV also slides in Merrill Lynch's new forecast, dropping to 8.2 percent growth from an earlier forecast of 10.5 percent.

Merrill Lynch's revisions come on the eve of UBS' annual Media Week conference in New York next week when leading ad forecasters such as Universal McCann's Bob Coen will unveil their revisions for 2005 and outlooks for 2006.

Merrill Lynch uses a so-called "bottom-up" method, explains Fine, which canvasses the expectations of analysts tracking specific industries that are major advertising categories. Based on this analysis, automotive--the largest single advertising category--will also have the slowest rate of growth in 2006, rising just 0.2 percent over 2005. The media industry, the third-largest ad category for the media business, will also have flat ad spending in 2006.

The highest growth ad sectors will be computers/software (+7.0 percent), "other retail" (+5.5 percent), and apparel/footwear (+5.0 percent).

In a positive note for marketers--but a negative one for the media industry--Fine attributes the weakening ad growth to a "lack of media rate inflation," indicating that media industry margins may also be slipping.

"Along with corporations' cautious attitude towards ad spending in an uncertain environment, we think the emergence of the Internet and other newer forms of marketing is allowing advertisers' dollars to work harder with more measurability," says Fine. "This greater efficiency has capped the ability of traditional media companies to raise ad rates, thus, in our view, explaining the underperformance of ad spending relative to GDP that we are observing. If we could measure ad units versus real GDP, we believe the relationship is intact."