While chaos and controversy prevail over a $700 billion federal bailout plan for Wall Street, a few things seem clear. No publicly discussed plan would immediately relieve the struggles of many mass-market consumers or companies. Experts say any positive impact from easing the credit crunch would not directly stop the bleeding of residential mortgage foreclosures and overleveraged businesses. However, the lack of congressional action apparently could make things worse.
Whatever action Congress finally takes would not prevent GDP from going negative this year, housing values from slipping another 15%, or unemployment and the cost of living rising to more untenable levels. Some of the estimated $1 trillion in bad mortgage debt that the federal government has proposed buying is held by hedge funds and foreign institutions that would not be covered by a federal bailout.
The Dow Jones, NASDAQ and some international markets plunged Monday in response to the House of Representatives' narrow defeat of the proposed historical bailout, despite the injection of $225 billion by nine central banks into global financial markets. With the continuing collapse and consolidation of U.S. financial institutions, and the rise of a handful of banking superpowers becoming a global phenomenon, concerns soar over a global economic slowdown and its devastating impact on the world's Main Street.
Economists such as NYU Stern School of Business Economics professor Nouriel Roubini are warning of a run on the trillion dollar-plus of the cross-border, short-term interbank liabilities of the U.S. banking and financial system as foreign banks fret over their safety and liquidity exposure to the domestic crisis. The first signs came in the collapse and consolidation of three foreign financial institutions Monday. What do they see that we don't? That the $400 billion in bad credit reported by the banks so far could eventually exceed $1.5 trillion as they are forced to write off not only housing debt, but bad corporate, consumer and student loans, and credit cards.
Bottom line: The six- to-18-month outlook is dismal for industries that are dependent upon advertiser and consumer spending.
Since all of the existing 2008 and 2009 advertiser and consumer spending forecasts were made prior to the worst of the current turmoil, it is likely that most will be revised downward in the coming months. How low will they go, and how will that adversely impact media companies?
At some point, businesses--which are potential marketers--may need to decide between making their payroll or advertising; consumers will have to choose between putting food on the table or buying the latest electronics. The choices won't be difficult.
Earlier this month, Standard & Poor's reported that nearly triple the number of companies in 2007 had defaulted on nearly $50 billion of debt so far this year. Of the 57 companies involved, 45 were outside the financial industry. The S&P's list of "weak link" companies in danger of defaulting over the next 12 months included major advertisers such as Tribune, General Motors and UAL. In fact, on Monday, the S&P lost $840 billion in value due to the market plunge. On the same day, the nearly bankrupt U.S. automakers began drawing on a $25 billion lifeline from the federal government aimed at bolstering their investment in energy-smart products, which surely will have limited application to the grassroots marketing that is critical to local and national media.
That the top 100 U.S. media companies (which are both spenders and receivers of ad dollars) realized only a collective 4.6% increase in 2007 revenues--the lowest since the 2001 recession--as determined by Ad Age is but one indicator of what's ahead in far more uncertain times. If there is one thing prognosticators have universally agreed upon, it is that 2008's presidential election and Olympics year would be a bullish prelude to an overwhelmingly bearish 2009. That 2008 has rendered an unstoppable deterioration means that 2009 could be worse than expected. And that means all bets are off for any kind of income or spending tied to the domestic or global economy.
The conditional exception may be much of the $9.2 billion prime-time upfront commitments the broadcast networks garnered last spring (3%-plus down from the prior year) and the nearly $8 billion in upfront commitments written by cable networks (almost a 12% increase over the prior year). While there will be some conditional cancellations in that spending, television will feel the overwhelming impact on its scatter and national spot, (which could be down at least 10% next year) and in its upfront sales in spring 2009.
Just last week, Nielsen Monitor-Plus reported lower-than-expected first-half 2008 ad spending across new and old media sectors, from newspapers to online ad segments. Even more dramatic was the amount of decline in advertiser spending in categories rocked by bad times, such as automotives, and industries such as financials undergoing extreme contraction. That cannot possibly translate into sustained or increased advertiser spending in the short term. TNS Retail has forecast holiday sales to grow a mere 1.5%, the lowest since the 1991 recession. Even Apple was down more than 14% on analyst downgrades for slowing iPod ecosystem sales in a deteriorating economy, contributing to NASDAQ's biggest one-day decline.
Indeed, this mess will impact the finances of every business and individual, which means that even the mega media companies with their solid cash flow and balance sheets need to go on the defensive. If corporate earnings fall from what was an anticipated 15% annual growth to 5% or negative annual growth instead (as many experts are now projecting), it will be because advertisers and consumers dramatically pull back on their spending through 2009. In fact, the third quarter is expected to be the first quarter of negative consumer spending since 1991.
This makes virtually all the outstanding forecasts look too optimistic.
At last check, Universal McCann research chief Bob Coen had revised his 2008 U.S. ad-spending forecast to 2% of $285 billion, down from a original 5% growth prediction. Also in July, Coen reduced his online display ad-spending forecast from 16.5% to 12% growth (or $11.7 billion) in 2008. Around the same time, Zenith Optimedia, BMO Capital Markets, Oppenheimer, Lehman Brothers and eMarket were among those firms that announced similar downward revisions.
The continuing trickle-down impact of the current financial crisis will surely hit home as reduced corporate earnings, advertisers and consumer spending and other fundamental benchmarks are revealed over the next several months--pushing forecasts lower at least through 2009.