by Jim Conaghan
The author is NAA’s vice president of market and business analysis.

On a warm, sunny afternoon last September, senior economists for the Bush and Gore campaigns spoke to a roomful of professional colleagues in Georgetown in northwest Washington, D.C. Lawrence B. Lindsey and Alan S. Blinder offered different views of fiscal policy, debating the potential effects of tax cuts, government spending and Social Security reform. They even critiqued each other’s plans for the projected budget surplus to 2010. One economist noted with wry amusement that 10-year budget surplus projections might be considered “fuzzy math” and that basing fiscal policy on them could be “a risky scheme.”

Two months later, it came down to a few hundred sun-tanned Floridians, few of them professional economists, who made the decisive judgment at the ballot box about Lindsey’s and Blinder’s political masters, and thus about fiscal policy for the United States.

Their collective wisdom in the November election was to send nearly equal numbers of Republicans and Democrats to Congress. That judgment ensures that the next president will rarely have budget proposals adopted without significant revision, thereby maintaining the status quo.

Many economists prefer a hog-tied national government. Neither the spending increases proposed by Albert Gore nor the large tax cuts recommended by George W. Bush are likely to be enacted. Some fear that either policy would stimulate the economy too much, eliminate the budget surplus and push the government back into large deficits. The Federal Reserve Board would react by boosting interest rates to cool the market at the risk of overcorrection, shoving the economy to the brink of recession.

Voters seem to agree that a divided government isn’t necessarily a bad thing. It encourages fiscal discipline. To paraphrase actor Michael Douglas playing Gordon Gekko in the 1987 Oliver Stone film “Wall Street,” gridlock is good.

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ECONOMIC OUTLOOK

So far, economists see no end to the record-long economic expansion in the next 12 months. Measured in current dollars, the economy grew 5.8 percent in 1999 and was on track to finish with a larger 7.4 percent gain for 2000. In fact, acceleration of growth in the second half of 1999 prompted the Fed to move interest rates up from 5.5 percent to 6.5 percent in the first five months of 2000 to navigate a “soft landing,” with sustainable economic growth and price stability.

The advance estimate of third-quarter Gross Domestic Product confirmed that the soft landing was on course. The expansion cooled to a 4.4 percent annual rate of GDP growth in nominal dollars during the summer, down from 8.3 percent in the first quarter. Retail sales slowed a little in most regions of the country before rebounding in September. Housing spending fell sharply, with construction of new single-family homes down 10 percent. A mixture of fragmentary reports and educated guesses about the final quarter of the yearÐremember, this article was written in November—point to nominal GDP growth improving to 5-to-6 percent.

The consensus for 2001 places nominal GDP growth in the same range. Forecasts from the Office of Management and Budget and the Congressional Budget Office suggest nominal GDP growth for the following three years averaging, 4.5-to-5 percent. Forecasts from the private sector for the same period vary from a low 4.7 percent to a high 6.3 percent in current dollars.

HEDGING BETS
Near term, accepting these forecasts might ease anxieties and give one renewed confidence. But economists continue to sift through the data to construct models about what might happen. What they prophesy is not always good. Most expect continued if slower growth in 2001; a few cast troubling straws in the wind that could derail the economy’s locomotive. Rising energy prices, especially for heating oil in the Northeast, could depress consumer spending this winter. Interest-rate hikes early in 2000 have already cut mortgage refinancing, crimping consumers’ ability to circulate more money.

And the wealth effect has gotten a lot less wealthier since last spring, as consumers’ assets lost value and their propensity to borrow declined. Some dot-coms are now dot-bust, with 130 biting the dust from January through mid-November 2000, according to Webmergers of San Francisco. The Nasdaq composite index dipped below 3,000 Nov. 13, 28 percent lower than January 2000.

One interesting perspective on how things might fall apart was offered by Business Week editor Michael Mandel in The Coming Internet Depression (New York, Basic Books). Mandel theorizes that the new technology-business cycle means longer economic expansions followed by deeper and harsher recessions. Unlike past lengthy expansions, venture capitalists’ funding of technology companies and the resulting financial boom are largely responsible for the current good times. When the economy gradually stalls, perhaps a gentle slide at first, the equity market will tank as venture capitalists seek other investments. If that happens, Mandel suspects that the Federal Reserve will not act quickly enough to cut interest rates, thereby compounding the problem.

And the combination of increased global competition and domestic deregulation has severely constrained pricing flexibility for many businesses. This disinflationary pressure means a greater reliance on cost controls to maintain profits.

The growing power of the equity market also acts as a constraint, at least for public companies. Companies are rewarded or punished in the equity markets based on current financial performance and expectations of future performance. As growing competition helps enforce price discipline, Wall Street also enforces efficiency through its stock valuations. And as the economy evolves, stock prices have become an essential component for funding innovation and propelling technological change.

For now, downturns remain speculation. The upside factors of productivity increases, well-capitalized financial markets, little overbuilding in the real-estate sector, low inflation and workers’ ability to change jobs continue to augur well for the immediate future.

ADVERTISING OUTLOOK
The 2001 advertising outlook mirrors the expected trend line for the overall economy: more dollars spent but at a growth rate a little lower than the previous year. McCann-Erickson Worldwide Senior Vice President and Director of Forecasting Robert Coen now estimates advertising in all media will increase 5.8 percent in 2001, down from his initial estimate of 6.5 percent, predicted last June.

UBS Warburg analyst Leland Westerfield also looks for a 6 percent increase in total ad spending. Westerfield expects radio to gain 8 percent overall, with the national component up 12 percent and local rising 7 percent. He looks for consumer-magazine advertising to climb 6 percent next year.

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Television will suffer from the usual comparisons following a year with both the Olympics and a presidential election. The 2001 forecast from the Television Bureau of Advertising in New York City anticipates small spending gains: up 1-to-3 percent for national spot advertising, 3-to-5 percent for local spots. Network advertising might be up in the 7-to-9 percent range, according to the bureau, with cable-television advertising hikes staying in the teens-percentage range.

Advertiser-spending forecasts for newspapers vary from the slightly bearish 4 percent to the rosy 7 percent, with most hovering within a half point of 5 percent. The Association’s prognostication: a 5.1 percent year-over-year gain.

Retail advertising. General merchandisers, long the bread and butter of local advertising, are still buffeted by consolidation, sales slowdowns and bankruptcy. Many retailers entered the holiday season with some trepidation, as third-quarter results failed to impress Wall Street. Kmart Corp. reported a third-quarter loss of $67 million; JC Penney posted a $30 million loss, with same-store sales down 3.7 percent; and Ames Department Stores announced plans to close 32 stores, taking a $140 million charge. Even retail juggernaut Wal-Mart reported lower, albeit positive, third-quarter numbers, up 4.9 percent in same-store sales from a year ago. Wal-Mart’s growth is increasingly driven by expanded grocery sales in domestic stores and overseas expansion.

Weakness in the general-merchandise sector has held back newspaper retail-ad gains in 2000. Through the first nine months, general-merchandise advertising in newspapers dropped 6 percent, dragging down gains posted by the building materials, computer store, food and furniture categories.

Other questionable retail sectors include apparel stores and consumer-electronics stores. Gap Inc. earnings were down 41 percent in the third quarter. Best Buy Inc. reduced its earnings estimate for the latter half of 2000, and its shares plunged by more than one-third. Competitor Circuit City’s outlook was also lower, despite a strategic decision to stop selling appliances.

It may have been a rough holiday season for retailers. If that was the case, then the need to clear out unsold merchandise could boost early first-quarter retail-ad spending. Beyond that, ad reps will have a hard time showing retail-category gains given a second-quarter increase of 5 percent in 2000, but advances will be somewhat easier for them in the summer. The Association’s numbers suggest that newspaper publishers will again struggle to a 3 percent dollar gain in the retail category during 2001.

Classified advertising. The cyclical behavior of this ad category will persist. Industry estimates suggest that annual automotive sales in 2001 will be down by nearly a million units from the 2000 level of 17.4 million. Automotive advertising, having slowed in the second and third quarters last year, would do well to see a low single-digit increase in 2001.

The real-estate market is slowing, with the National Association of Realtors in Washington, D.C., estimating that single-family home sales dropped 0.7 percent and housing starts fell by 2.2 percent. Housing inventory in 2000 was still at low levels, below 2 million units. Should inventories remain near their historic low, publishers would not see any substantial improvement in real-estate advertising. If the economy slows a little more than expected, the subsequent rise in inventories will boost ad sales.

Job growth also has slowed. Employers added a monthly average of about 74,000 new jobs to the economy from May through October, down from the monthly average of nearly 300,000 jobs in the previous six months. Meanwhile, jobless claims hit a two-year high in mid-November, due to temporary layoffs in auto factories. Nevertheless, the tightness of the labor market remains a short-term fact of life, with unemployment expected to rise only slightly during the course of the year.

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In short, newspaper classified advertising growth will be modestly slower in 2001, as befits an economic soft landing. Look for an overall gain in the 5 percent range, driven primarily by recruitment ads.

National advertising. Although the smallest component of the mix, national advertising should continue to perform well. Even with a slower economy, the long-term secular trend argues for an increase in the level of advertising in newspapers as fragmentation continues to make it difficult for advertisers to deliver messages to mass audiences using media designed for market segments.

Proliferation of niche publications, cable-television channels and radio stations can be attractive in terms of targeting small audiences. But that fragmentation exacerbates the problem of putting together multimarket ad campaigns to build audience for mass-market products.

Categories such as medical products and drugs, toiletries, and other packaged goods, along with entertainment, telecommunications and utilities, drove national growth in 2000. These segments also will provide growth this year, and national advertising should manage a double-digit increase in 2001, even with reduced income from the dot-com segment.

OVER THE HORIZON
The forecast in last September’s Presstime ran with the caveat, “Your mileage may vary.” That still holds true, as trends in one specific newspaper market may not reflect movements in the advertising economy nationwide.

National forecasts are no substitute for local market analyses. Newspaper executives need to collect and analyze local business data to formulate long-term strategic plans for advertising (see p. 51). Given a slower but still growing economy, the prudent course suggests engaging in the hard work of identifying and selling more local advertising. Otherwise, a publisher’s revenue projection for 2001 could be the feared “risky scheme” based on “fuzzy math.”

Copyright 2001, Newspaper Association of America. All rights reserved.

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