On a macro basis, Fitch Ratings believes the world economy faces a severe global recession in 2009. Fitch forecasts that the contraction in output among the major advanced economies in aggregate will represent the steepest decline since the Second World War at about -1%. Fitch expects real GDP in the U.S. to decline approximately 1.2%, while inflation is forecast to be 2.7%.

Against this backdrop, the Fitch media team is more cautious regarding the advertising environment than most major advertising forecasts, none of which currently predict advertising to be nearly as weak as 2001, the worst ad recession (on both a nominal and real basis) since 1970. According to Universal McCann and the Bureau of Labor Statistics, nominal advertising did not decline during the mid-1970s nor the early 1980s recessions (due to high inflation), declined a cumulative 2% in the early 1990s and approximately 7% in 2001. Real advertising declined cumulatively in the high 8% range in 1974 and 1975, 4% in 1980, a cumulative 7% in the early 1990s and 9% in 2001.

To put 2001's 7% nominal advertising decline in context, Fitch recognizes that it followed a very strong advertising run with increases in 1998 (up 10%), 1999 (up 8%) and 2000 (up 11%) due to the flood of venture capital into dot-com start-ups - much of which passed directly through to the ad market. By contrast, advertising growth the past few years has been more restrained with 2005 (up 3%), 2006 (up 4%), 2007 (down 1%) and 2008 (forecasted between down 1% and up 2%), so there is a much lower peak from which to fall. Regardless, Fitch believes that economic weakness could extend well into 2010 such that the cumulative affect of this downturn could approach 2001 levels (down 6%-9% in real terms).

Combined Effect of Local and National Weakness:

First, the 2001 ad downturn was concentrated in national advertising, while the 2008-2010 downturn will include both local and national components. In 2001, low interest rates and the availability of credit fueled consumer home and auto purchases (and advertising) that helped insulate major ad spending categories and local economies from severe economic weakness. Political and Olympic spending masked the local market weakness to some extent in 2008, but Fitch expects the absence of these revenue sources in 2009 will expose the depth of this weakness. In Fitch's view, there are more catalysts for deterioration rather than improvement for local advertising going into 2009.

Fitch expects this weakness in local markets will be compounded by national advertising pressures due to the impact of the credit market events that hit while many large national advertisers were planning their 2009 ad spending budgets. With advertising being one of the most easily scalable fixed costs, some major advertisers could plan to pull back on national campaigns considerably until there is more visibility in the market. Fitch is also concerned that they could pull back even more in 2009 than in the 2001 downturn because the credit crisis has raised the stakes and forced many companies to emphasize capital preservation and liquidity, not just earnings growth.

Broad Weakness across Major Advertising Categories:

Fitch expects pressure across a wider spectrum of advertising categories in 2009 than in the past downturn. Fitch expects that five of the top 10 advertising categories or over 40% of the ad mix (according to Advertising Age) will be under meaningful pressure next year: No.1 Retail (12% of total), No.2 Automotive (12%), No.5 Financial Services (6%), No.6 General Services (6%) and No.9 Airlines, Hotels and Car Rentals (4%). In particular, the automotive category (which can represent over 20% of a broadcast affiliate's revenue) will present meaningful challenges. Fitch maintains that the auto industry is enduring structural changes that will permanently reduce local and national auto advertising and that the supply of available advertising units will need to contract as a result.