• by March 14, 2001

(Reuters) - Advertising spending in the United States will grow by just 2.5% this year, Merrill Lynch said in a report released on Wednesday, lowering its previous estimate of 4 to 4.5% growth.

Total U.S. ad spending grew by an estimated 9.1% in 2000, according to the Merrill Lynch report. It said advertising spending was growing at a slower rate than nominal gross domestic product, something that has not happened since between 1989 and 1992.

"Advertising will grow at a slower pace than nominal GDP in 2001 due to two factors-the absence of dot-com spending in traditional media and the fact that ad expenditures have outpaced nominal GDP growth for the last eight years, setting the stage for payback time," the report said.

However, Merrill said the market should bounce back next year, with ad spending growth of 5.5%.

It also said it was continuing to recommend shares of marketing communications giants Omnicom Group Inc. and Interpublic Group of Cos. Inc. because their marketing businesses are growing at a faster pace than their traditional ad businesses. Clients are not cutting their ad budgets, but they are delaying spending on advertising, Merrill said.

"However, as budgets are typically reviewed on a quarterly basis, we would not be surprised to see reductions for 2001 as the slow start to the year becomes too much to overcome in the next nine months," the report said.

Omnicom shares were down 20 cents at $82.80 in midday trading while IPG's shares were down 34 cents at $35.78.

Merrill Lynch also said it expects 2001 online ad revenues to fall by 25%, sharply down from its previous estimate of flat growth for this year as Internet media companies like Yahoo Inc. (NasdaqNM:YHOO - news) give a gloomy picture for this year.

Merrill is now projecting total online ad spending of about $6 billion this year, down from $8 billion in 2000. But it also predicted growth rates to improve dramatically in the near future, with 20 to 30% growth in 2002 and beyond.