• by Mark Walsh  @markfwal, October 5, 2009

U.S. online ad spending dropped 5.3% to $10.9 billion during the first half of 2009 compared to a year ago, and the weakened economy is expected to push down total Internet ad dollars for the full year for the first time since 2002.

New data released Monday by the Interactive Advertising Bureau and PricewaterhouseCoopers also showed that spending in the second quarter fell 5.4% to $5.4 billion from the year-earlier period, and was roughly flat with the $5.5 billion total for the first quarter of 2009.

Based on historical trends, David Silverman, a PwC assurance partner, projected that online ad spending this year would fall in the range of $21 billion to $22 billion -- down from $23.4 billion in 2008. "The economy has clearly had an impact over the last two quarters," said Silverman, during a conference call about the latest IAB figures.

While acknowledging the online ad contraction this year, Sherrill Mane, senior vice president of industry services at the IAB, tried to frame it in the context of the overall ad decline of 15.4%, citing Nielsen figures for the first six months of 2009. "Within that none-too-cheerful landscape, the Internet decline is relatively small," she said.

In the last year, online ad industry executives and analysts have shifted from predicting slower growth in 2009 to flat spending to now conceding that the year-over-year dollar total will fall for the first time since the 2001-2002 recession.

Investment bank Cowen and Company last week affirmed its earlier projection of a 5% drop in U.S. Internet ad spending, while predicting a 6% increase in 2010. David Hallerman, senior analyst at eMarketer, said the research firm is in the process of revising its Internet ad forecast, but expects a full-year decline of less than 5%.

While expecting continued negative growth in the second half of the year, Hallerman said the ad downturn has probably bottomed out. "There was an uptick in consumer spending in August, so there are indicators the economy is slowly moving forward," he said.

Hallerman warned that it could be months before unemployment rates fell measurably, and that conditions will make it feel like a weak economy for some time. Federal Reserve Chairman Ben Bernanke said last month that the recession was "likely over" -- but warned that it could be months before unemployment rates fell significantly, and that conditions will make it feel like a weak economy for some time.

Indeed, the unemployment rate hit 9.8% in September, the highest since June 1983. The rising jobless figure was reflected in the steep decline in online classified and directory advertising in the first half of 2009, plunging 32% from $804 million to $548 million a year ago. The category has also shrunk from 14% to 10% of Web ad budgets.

Silverman said classifieds have been hit hard both by the economic slump-reducing help-wanted ads and real estate listings -- as well as the growth of low-cost and free services such as Craigslist.

As expected, search remained steady -- rising 1% from a year ago, as marketers continue to shift ad dollars to performance-based advertising. The category now represents 47% of all online ad dollars, up from 44% in the second quarter of 2008. (Performance ad formats overall accounted for 58% of spending, up from 54% a year ago.)

More surprising was that spending on much-maligned banner ads was essentially flat from a year ago at $1.2 billion, accounting for 22% of the $5.4 billion quarterly total. "Flat in a market down 5% is quite exceptional," said Hallerman, adding that it showed online has become a requisite element of mainstream campaigns. Digital video remained the star of the display ad category, increasing 38% to $477 million.

While industries such as automotive, financial services and retail continued to show ad weakness as a result of the economic downturn, the report indicated that spending was increasing slightly in more recession-proof areas such as media, entertainment and telecom.

Jeff Lanctot, chief strategy office at Razorfish, said spending this year will ultimately come down to the fourth quarter. "If the industry sees the typical holiday bump, it will show that optimism is translating into bigger budgets, and that growth will soon begin again," he said. "If the increase in spend never comes to pass, it will leave the industry wondering whether we might have another long year ahead."