• by Joe Mandese , August 11, 2011

Noting that ad agencies are "proxies" for overall economic growth, a major Wall Street securities firm has downgraded Madison Avenue's prospects following a new spate of macro-economic turmoil. Calling its cuts "pre-emptive," the equity research team at Deutsche Bank said the major impact of a new economic calamity will be in 2012, with only slight downgrades for the remainder of 2011 - due mainly to the fact that most major marketers cannot react "quickly enough" to cut their near-term advertising budgets.

"We did not expect to be dusting down our recession sensitivity scenarios only two years after previously running them," lead Deutsche Bank Wall Street analyst Matt Chesler writes in a quick assessment of the sector in the wake of S&P's downgrade of the U.S.' credit rating, and similar crises rumbling through Western Europe.

The Deutsche team said it was too early to tell whether it will result in a "mid-cycle slowdown" or an actual "double-dip" recession, but that whatever the hiccup is, it merits a downgrade in the prospects for the U.S. and global advertising economy. While none of the major agency holding companies have issued any revisions to their own company or the industry's estimates, Deutsche Bank is now calling for "a scenario of 3% organic declines in 2012."

"Ad spending has not fully recovered from 2008-09 lows so our assumption is that if there is a downturn, it will not be as severe as 2009," the analysts' report notes. "Agencies have stronger balance sheets now (as do the major brand owners who pay them), and industry headcount has not been rebuilt to previous peak levels."

While that outlook is not as bad as some might expect looking at the reaction of Wall Street investors and the media frenzy over the economy, it is a significant downgrade from Deutsche Bank's previous projection of a "5 to 6% organic growth" rate for ad agency stocks next year, which the securities firm now assumes will be more around "1.5 to 2%."