• by Erik Sass , July 22, 2009

With the recession's second birthday coming up this November, exhausted Americans are understandably hopeful that the downturn may be coming to an end. But any recovery will likely be a slow, grueling affair, according to a broad consensus among officials and analysts -- and unfortunately, their forecasts suggest the prospects for a rebound in ad spending look even worse.

To begin, the word "recovery" isn't entirely inaccurate, as ordinary Americans are unlikely to see improvement in the most visible economic indicators anytime soon. That's according to Fed Chairman Ben Bernanke, who told Congress on Tuesday that while the economy's core financial infrastructure has stabilized, the main engines of the economy appear to be stuck in low gear or even reverse, warning "It's not going to feel like a strong economy" into 2010.

This view was echoed by Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, who told business leaders Monday that the recovery "will be weak compared with historic recoveries from recession."

The gloomy outlook from Fed officials is confirmed by analysts focused on employment, housing, the auto industry and consumer spending. Essentially, weakness in all these interrelated areas means there is no high-performing sector to drive economic growth.

The unemployment rate continued its long, steady rise, ticking up from 9.4% in May to 9.5% in June. That compares with 4.9% in January 2008 (altogether the economy has shed about 7.2 million jobs since then). Of course, the rising unemployment rate will have broad economic impacts, slowing and possibly even reversing the recovery in some areas.

In the housing market, rising unemployment is resulting in increased foreclosures, as laid-off workers can no longer afford their mortgage payments. This is obviously bad news for banks: heading into the third quarter, the Financial Stability Oversight Board warned of "deterioration of creditworthiness and increasing default rates for some borrowers," meaning the fragile banking system could be swamped by another wave of bad mortgages that will flood the housing market with more cheap properties -- driving values down even further, per Mike Larson, a real estate and interest rate analyst with Weiss Research.

Along with rising unemployment, a continuing decline in home values could seriously depress consumption, which has usually driven economic recoveries in the past, according to Bernanke.

There's no question that the consumer spending outlook is poor. In his Nashville speech, the Fed's Lockhart characterized the trend in consumer spending as "mostly negative" -- a view confirmed by data from the National Retail Federation, which has shown single-digit percentage declines in retail sales (excluding automobiles and gas) for eight months in a row from November 2008 to June 2009. There's not much chance of this trend reversing in the near future, either, according to a survey of U.S. consumers by the Royal Bank of Canada.

Rising gas prices are a big part of the problem, and yet another drag on a potential recovery, according to economists, who see consumers prioritizing their spending and cutting back on "extras," like new clothes and electronics. Historically, it's unusual for the price of gas to go up during an economic downturn, and the current increase is an ominous sign. The International Energy Agency is predicting a steady decrease in spare production capacity, accompanied by a steady increase in oil prices, from 2010 onwards.

Of course, the combination of high unemployment, depressed consumer spending, and rising gas prices equals bad news for the auto industry as well. June sales were some of the worst on record, exceeding analyst expectations with an overall drop of 28% compared to the same month in 2008, to 859,000; that's also a 4.5% drop from May, when Americans bought 890,000 light vehicles. Jessica Caldwell, an industry analyst for Edmunds.com, was cautious: "Bouncing back is the wrong term to use for auto sales. It's going to be a slow, gradual recovery."

So what are the implications for advertising? Consumer spending is likely to remain depressed and may even decline, while big advertisers are unlikely to lose the siege mentality that has shaped their ad spending strategies over the last year.

For reasons of self-interest, media executives often argue that downturns require more advertising, rather than less, as brands compete for fewer consumer dollars -- but so far, this has not proved to be the case. This is especially true for beleaguered retailers and carmakers -- traditionally two of the biggest advertising categories, now on the ropes and fighting for their lives.

Financial services will also remain depressed, as the housing market remains perilous and the credit crunch does not appear to be abating.

In other words, it looks like the advertising economy will closely parallel the overall economy -- with a steep decline this year followed by stagnation or very slow growth, according to widely cited ad forecasts. For example, on July 13, Interpublic's Brian Wieser predicted a total drop in advertising spending of 14.5%, followed by an anemic growth rate of 1.5% from 2010-2014, noting: "The indicators are not very strong."