BIA’s Assessment of the Current Outlook for Local Advertising in the U.S.
As we update our estimates for the local advertising forecast in the U.S. and by market for 2020 and beyond, we are making significant revisions to our prior forecast to incorporate considerations related to expanded political advertising and the impact of the COVID-19 virus, and, to a lesser extent, the drop in oil prices. While BIA has some history related to political advertising and spending to date, we are in a somewhat unchartered area related to the health, economic and advertising impact of the virus.
We know that the virus is highly transferrable and that it disproportionately affects older people, especially those with health issues. It is difficult, however, to get accurate statistics on the spread of this virus and other metrics since many cases are mild and go undetected. Additionally, we do not know of the seasonal nature of this virus, if any. We can, however, look at the impact on other countries and prior epidemics.
In China and other countries, the apparent control of the virus appears to have been somewhat rapid. Fatality rates among working adults and children have been low and steps are being taken for older adults at risk. The governments have intervened, and younger adults have followed prescribed precautions.
A World Bank study of other epidemics indicated that people’s behavior to avoid the virus was primarily responsible for the economic impact. Much of the economic impact will be related to government bans, business closures and virtual office operations, as well as individuals reducing trips to the market, travel and going out.
In the U.S., the economic impact could evolve in a few different ways. We could see a relatively quick rebound beginning once the health impact is more quantified, a slower rebound over a longer period or a decline into a recession. Given the significant steps taken by government officials and agencies to minimize the spread of the virus and what has happened in other countries, we believe we are looking at a two to three-month period to stabilize the epidemic.
Despite solid growth in recent years and the first two months of 2020, the stock market has recently experienced the worst decline since 2008, as investors acted quickly because of their concern about a possible recession. We consider this a panic reaction to this new environment and believe that cooler heads will prevail over time as the uncertainty of the situation is mitigated. If cooler heads do not prevail, we could be looking at a recession that would lead to a real GDP decline through the remainder of 2020. (Keep in mind that the recession of 2008 had four quarters of negative real GDP growth followed by a strong rebound in the second half of 2009 and 2010.)
The U.S. economy had real GDP growth of 2.5% in 2017, 3.1% growth in 2018 and 2.1% growth in 2019. In the first two months of 2020, we experienced strong economic growth with strong job numbers, low unemployment and a strong stock market. Given what we know today and taking all these factors into consideration, we believe the most likely outcome will be a U-shaped recovery. We believe the spread of the virus will be stabilized in the next two to three months and the U.S. economy will begin to recover in the third quarter and could be back to around 1.5% to 2.0% real GDP growth in the fourth quarter.
If the virus is contained more rapidly, we would not be surprised to see 0% to 0.5% real GDP growth in the second quarter and 0.5% to 1.0% real GDP growth in the third quarter. In 2021 and beyond, we expect the impact to be minimal and real GDP growth to rebound in the 2.0%-plus range. We will incorporate this scenario into our update of local advertising as we consider this most likely today. Of course, if new factors come into play in the next month, we will revise our forecasts again.
The change in human behavior and activities and these economic considerations will have a direct impact on local advertising in the U.S. A look at Chinese media companies indicates a potential decline in revenue in the 20% to 30% range. U.S. media companies and agencies are experiencing meaningful declines, but not to those levels yet.
SaaS based business appear to be better suited to withstand volatility. Google and Facebook have not been as severely impacted, while the Amazon platform will feel the impact due to many smaller sellers. One important factor is that about 40% of annual consumer ad budgets occur during the holiday period in the second half of the year. As such, if recovery occurs as we anticipate, the impact on local advertising will be somewhat mitigated. It is important to note that the impact on local advertising will differ based on the media and the specific business verticals and will vary from market to market.
Looking at self-quarantine in China indicates that mobile Internet usage increased to nearly 7 ½ hours per day. According to Nielsen, TV viewing was up from 6 hours to 8 hours per day. We would expect these two areas to see some increases in the U.S. Additionally, we would anticipate out-of-home advertising to decline as more people will be working virtually and less will be travelling.
With regards to verticals, we see restaurants, bars, theaters and tourism experiencing rapid slowdowns. We expect a decline in retail activity, especially at luxury stores and shopping malls. Discretionary spending will be cut, and savings will increase for those still employed. We would also expect an increase in online deliveries and QSR drive thru activity.
Certainly, the auto industry will be negatively impacted by the cut back in supply chain parts in China and more cautious spending in the U.S. Similar declines will be felt in the computer & electronics fields. Commercial real estate will be impacted, but lower mortgage rates could lead to a boom once we emerge from the downturn.
The shutting down of sporting events, conferences, schools and universities will impact many cities. Austin will feel the loss of South by Southwest (SXSW®), which brought in over $330 million to local businesses in 2019. Likewise, Las Vegas will be impacted by the loss of the National Association of Broadcasters (NAB) spring event and other conventions and the lack of activity at the casinos and local businesses.
As spring breaks and summertime approaches, Florida, Arizona, California and other recreational destinations may feel the impact of a decline in tourism. California port cities are already feeling the impact of the decline in China imports and many large cities will experience significant declines in economic activity.
At BIA, we are continually monitoring the fluctuating situation affecting local advertising and will be working hard to factor all these considerations into our nationwide and market-by-market local advertising forecasts.
We will be issuing new forecasts in early April and for our clients, we’re going to start releasing guidance by business vertical this week. If there’s an issue you’re challenged with or concerned about, please reach out to us and we’ll be glad to help you.