- S&P Global Ratings economists recently updated their expectations for U.S. GDP growth to 0.7% in 2023 and 1.2% in 2024, and they now expect a very shallow recession during the middle two quarters of 2023.
- As a result, we raised our 2023 U.S. ad forecast by 20 basis points (bp) to 2.8% reflecting our view that any recession in 2023 will be shallower than we had previously expected. We increased our estimates for radio and local TV to a decline of 10% and a decline of 17.1%, respectively. Our digital ad growth expectations are unchanged at 9.0%.
- We believe there is little visibility into second half of 2023 advertising trends and believe there's too much economic uncertainty to call the extent and pace of the eventual recovery.
Advertisers Have Already Been Preparing For A Recession
To understand 2023 advertising trends, one needs to first look at what happened to ad spending in 2022. Early in the year, advertisers reacted to fears of persistently high inflation, weakening macroeconomic metrics, and troubling geopolitical events by pulling back advertising spending. In particular, digital and radio advertising, which are both bought close to airtime, weakened rapidly toward the end of the first quarter. National TV followed suit as the TV scatter market (which is bought on a real-time basis) weakened at the end of the summer, and then further softened toward the end of the year. As a result, we estimate total ad spending grew just 6.1% in 2022, below our previous (October 2022) forecast for 7.8% growth. We believe this miss was driven by digital (8.7% growth versus previously 10.8%) and national (broadcast and cable network) television (4.5% decline versus previously 0.5% growth).
Based on our industry conversations and public comments by media companies, we believe visibility into current advertising trends is limited as advertisers remain cautious on the outlook for consumer spending and continue to make spending decisions closer to airtime. In our opinion, the U.S. advertising ecosystem is behaving exactly as one would expect it would act if it believed that we were heading into a macroeconomic recession.
We Expect A Mild And Shallow Midyear Recession In 2023
S&P Global Ratings economists recently revised their 2023 forecast and now expect a very shallow recession in the U.S. during the second and third quarters of 2023 (see "Economic Outlook U.S. Q2 2023: Still Resilient, Downside Risks Rise," published March 27, 2023). Key takeaways from our revised forecast include:
- U.S. GDP growth: Our forecast is for 0.7% growth for 2023 (previously a 0.1% decline) and 1.2% for 2024 (previously 1.4%). We expect the U.S. economy to fall into a very shallow recession during the middle two quarters of 2023.
- Consumer spending, which is more closely correlated than GDP with ad spending, will grow at 1.2% in 2023, ahead of GDP growth, and 0.9% in 2024, modestly slower than GDP growth.
- Unemployment: We now expect the unemployment rate to reach 4.1% by the end of 2023 and peak at 5.4% by early 2025 before starting to decline in late 2025.
- Inflation: Inflation likely peaked in third-quarter 2022 but will remain high on continued supply-chain disruptions in certain sectors. Core prices--excluding food and fuel--are expected to remain above the Fed's 2.0% target until sometime in 2024.
- The Fed: We now expect the fed funds rate to peak at 5.00%-5.15% by May and for the Fed to make the first interest rate cuts by mid-2024. We expect the fed funds rate will be 4.0% until late 2024, as the Fed commits to its "higher for longer" call.
|S&P Global Ratings U.S. Macroeconomic Forecast|
|(year % change)||2023f||2024e||2025e|
|Real consumer spending||1.2||0.9||1.8|
|Source: Economic Outlook U.S. Q2 2023: Still Resilient, Downside Risks Rise, March 27, 2023.|
Advertising Has Become Even More Complex
Analyzing and forecasting ad spending has become very difficult in the last 10 years. Advertisers have many more options to spend their ad dollars than they used to--for example, in the last five years, TV has morphed from linear TV (broadcast, cable, local) to now include long-form video, connected TV, programmatic, streaming (FAST, AVOD, hybrid SVOD), and short-form video (YouTube for example). The traditional buckets (linear TV, print, radio, outdoor) now include a digital component that generally has different characteristics than the legacy channels, in particular, short-term programmatic buying versus salesforce-driven buying. In addition, new ad categories have reached scale. For example, according to some third-party industry research, retail media networks, which are digital ad platforms offered by retail companies such as Amazon, Walmart, Krogers, and Home Depot, now generate over $20 billion in ad revenues, more than print, or radio, or outdoor. We have yet to include this new category in our forecast as there is little or no financial disclosure by the retail companies that offer retail media networks.
Overall U.S. Advertising Forecast
We raised our 2023 U.S. advertising forecast by 20 bp to 2.8% growth and introduced our preliminary 2024 forecast of 8.4% growth. The changes to our 2023 expectations include a 300-bp increase to outdoor (now 5%), a 500-bp increase to radio (now a 10% decline) and a 180-bp increase to local TV (now a 17.1% decline). We maintain our 9% growth assumption for total digital (which includes search, social, digital video, and banner) and our total TV (local, broadcast, and cable) ad spending estimate is essentially unchanged at a 8.1% decline.
Advertising in 2023 should benefit from the return of auto advertising, as inventories return to normal and manufacturers launch new EV models, and from travel advertising driven by continued strong demand from consumers to travel. These positive trends will be countered by headwinds from a number of weakening categories including insurance, housing/mortgage lenders, financial services, and crypto currency.
Two additional trends could favor advertising in 2023. Advertisers learned from the last two economic crisis (the pandemic and the 2008/2009 Great Financial Crisis) that they needed to continue to focus on brand investment, despite the macroeconomic environment, to maintain competitive market share exiting from an economic downturn. This was especially important if competitors continued to spend on brand advertising.
The impact of inflation on gross ad spending is also positive. Consumer packaged goods (CPG) companies, for example, set their marketing budgets as a percentage of revenues. CPG companies have pointed to higher material costs to raise prices for their products which has boosted revenues, and thus grown their marketing spending.
Our 2023 total digital ad growth rate forecast is unchanged at 9%, and we expect 2024 growth to be slightly higher at 10.5%. Within the digital category, our growth forecasts for 2023 are unchanged for search, social, and digital video at 10%, 7%, and 15%, respectively. For 2024, we expect search to grow by 10%, social to grow by 9%, and digital video to grow at 24%. We believe that digital advertising is a leading indicator of economic activity and so we expect improvement ahead of other forms of advertising. Still, the modest changes to our 2023 economic forecast don't have a material impact to our advertising forecast though we do expect an ad recovery to be more back-half weighted due to the continued uncertainty in the overall macroeconomic landscape. We continue to expect faster long-term digital advertising growth than the other ad media, though our expectations are more tempered for the search and social categories as other digital outlets like video and retail media networks should grow in importance and become a larger share of the overall digital advertising pie.
National. Our 2023 forecast for national television advertising is for a 4.4% decline, 40 bp weaker than our previous forecast. We now expect cable network advertising to decline 4% and for broadcast TV advertising to decline 5.2%. We assume cable's weakness will result from rapidly declining audience ratings which is putting downward pressure on inventory prices (defined as CPMs, or cost per thousand viewers). The cable networks have limited ability to reverse this trend as, other than the sport-focused networks, they lack the sports programming to draw in and retain audiences. Broadcast TV's larger decline is due to the lack of Olympics in 2023 (compared with 2022 which generated $1.1 billion in advertising revenues). Our 2023 forecast assumes that the scatter market, in which advertising is sold on a real-time basis, remains choppy until the start of the 2023/2024 TV season because there isn't any key sports or other must-watch programming to draw in viewers until the start of the NFL season. For 2024, we expect a modest rebound in national TV advertising by 1.7% as broadcast TV will grow 7.7%, benefitting from the 2024 Summer Olympics in Paris. Countering that, we expect the cable networks will see a 1% decline in advertising due to continued weakening audience ratings. We believe national TV will increasingly become a tale of have's and have-not's, specifically those broadcast and cable networks that have a strong stable of sports, particularly the NFL, and news, especially in a Presidential election year, and those that don't. Those network with sports programming will be able to not only demand higher CPMs for their sports ad inventory but also sell more non-sports ad inventory as they will bundle their sports- and non-sports inventory to advertisers.
Local. We raised our 2023 core advertising forecast by 200 bp to a 3% decline. While we expect local TV advertising will decline during a recession, we expect the industry will benefit from easier year-over-year comparisons as the year progresses due to a meaningful crowd-out from political advertising in the second half of 2022. While some companies underperformed their political advertising expectations in 2022 due to more mobile PAC money, we believe the overall industry experienced a record year for political spending in a midterm cycle. At the same time, we expect local TV will benefit in 2023 from the resurgence in automotive advertising as inventory continues to build, although it could take several years for the category to recover to pre-pandemic advertising spending levels. The automotive category remains an important category for local TV, contributing 20%-25% of advertising revenue prior to the pandemic. We expect local advertising will continue to perform better than national advertising in 2023, given its focus on the bottom of the funnel campaigns. We expect core advertising losses in 2023 will largely be recovered in 2024.
Radio. We raised our 2023 radio advertising forecast by 500 bp to a 10% decline given our expectations for a shallower recession. That said, we can't determine at this point both the extent of a decline in radio advertising because of a potential recession and its subsequent recovery after the recession ends. Radio advertising has some of the shortest lead times in media, which gives us very little visibility into forward trends. We believe the industry will behave similarly to previous downturns, where it lost significant portions of its advertising base and failed to recover significant portions of that lost revenue post-recession. We estimate the industry only recovered to around 80% of pre-pandemic levels in 2022 before macroeconomic conditions started to deteriorate. Radio spots are still largely bought through a sales team (rather than a data platform), such that--according to iHeartMedia CEO Bob Pittman "You've got somebody basically allocating money to sectors often based on emotionality and personal bias."
Outdoor. We raised our 2023 outdoor advertising forecast by 200 bp to 5%. We believe some outdoor advertisers will delay spending in a weak economy, therefore softening the industry's revenue growth. However, over the long term, we believe outdoor advertising remains an attractive way to reach consumers given its captive audience of drivers, commuters, and pedestrians. At the same time, the industry's conversion to digital billboards from static reduces the time needed to place an ad, allowing companies to quickly book business as economic conditions improve.
|S&P Global Ratings' Revised U.S. Advertising Revenue Forecast|
|Previous (October 2022)||Change||Revised (March 2023)||Preliminary (March 2023)|
|Digital video (%)||15.0||-||15.0||24.0|
|Total digital (%)||9.0||-||9.0||10.5|
|Local television (incl. political) (%)||(18.9)||1.8||(17.1)||19.6|
|Local political advertising (mil. $)||1,100.0||-||1,100||4,000|
|Network television (%)||(5.1)||(0.1)||(5.2)||7.7|
|Cable television (%)||(3.5)||(0.5)||(4.0)||(1)|
|National television (%)||(4)||(0.4)||(4.4)||1.7|
|Total television (%)||(8.2)||0.1||(8.1)||6.5|
|Legacy advertising (excludes Digital) (%)||(9.2)||0.8||(8.3)||3.9|
|Total advertising (%)||2.6||0.2||2.8||8.4|
|f--forecast. e-- estimate. Network and cable TV includes Olympics. Outdoor includes transit Source: SNL Kagan, S&P Global Ratings estimates.|
Upside Potential Or Downside Risk?
Our base case assumes that advertisers hold back on spending as they continue to anticipate a slowdown in consumer spending. However, a case can be made that given the expectations for a milder recession, advertisers may either fail to reduce their spending further or ramp up their spending earlier than we forecast. Given that so much of advertising today is bought and sold so close to airtime, advertising trends can change very quickly. This change in advertiser behavior might suggest that advertising has become more of a leading indicator of economic health than a lagging indicator, a shift that we will watch closely.
Our outlook for most ad-based media companies is stable because we view an economic recession as cyclical. We are less likely to lower ratings and will instead revise outlooks if we believe credit metrics are only temporarily harmed by a short and shallow recession and a company demonstrates a longer-term ability and willingness to restore credit quality.
That said, some media subsegments facing secular pressures will be in a worse position, and lower-rated companies that are facing both a slowdown in advertising and persistently elevated interest rates could see cash flow and coverage metrics become permanently impaired. We have already taken numerous rating actions in 2022, most notably on radio and digital marketing companies, reflecting these macroeconomic risks.
- Economic Outlook U.S. Q2 2023: Still Resilient, Downside Risks Rise, March 27, 2023
- Industry Top Trends 2023: Media And Entertainment, Jan. 23, 2023
- Assessing The Impact Of Higher Interest Rates On U.S. Media And Entertainment Companies Rated 'B-', Jan. 9, 2023
- U.S. Advertising Forecast Cut As Odds Of Recession Increase, Oct. 13, 2022
- Assessing Media's Vulnerability To Today's Macroeconomic Risks, Aug. 3, 2022
This report does not constitute a rating action.
|Primary Credit Analysts:||Naveen Sarma, New York + 1 (212) 438 7833;|
|Jawad Hussain, Chicago + 1 (312) 233 7045;|
|Rose Oberman, CFA, New York + 1 (212) 438 0354;|
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.