Spot the Recovery: Advertising Revenues May Be Showing Signs of Life

Spending on advertising is a lagging indicator for economic recovery. Companies tend to set their budgets on annual cycles, pegging their adspend to a percentage of sales. Even the most nimble of advertisers only adjusts their advertising on a quarterly basis. So any sign of an uptick in the revenues of advertising agency holding companies could mean that the recession -- at least financially -- is over. (Jobs, of course, are another thing.) That sign has arrived.

The following graphs show the revenues of six major advertising companies -- Omnicom (OMC), Interpublic (IPG), Publicis (PUB), MDC Partners (MDCA), Lamar Advertising (LAMR) and Valassis (VCI) -- plotted sequentially since Q3 2007. These companies create or place most of the advertising you see in the U.S.

At first glance, it's grim: All the lines are pointing down. That's why their quarterly earnings reports are so depressing: The annual comparables all show big declines. But if you ignore the annual comparable in favor of a sequential look -- i.e. how are these companies doing this quarter compared to last quarter? -- you find that five out of six of them have shown some increase in revenues in the last couple of quarters. (Continued below ...)

• Source: SEC filings. Lamar is a billboard network operator. Valassis is a coupon provider. Publicis is a French company, and its quarterly reports were calculated in part by dividing in half its six-monthly disclosures. WPP (WPPGY) was not included because it acquisition of TNS distorted its revenues.

Does this mean that economic recovery is around the corner? It might. Companies whose adspend is a percentage of sales can only increase their spending on advertising if their sales are going up. These charts suggest that is happening. But the recovery in adpsend is anemic at best. We'll need a couple more quarters of growth to know for sure. (The other caveat here is that the revenue in the charts represents fees from advertising, not the total actually spent on ads. Companies in theory could increase the amount they pay for work and still buy fewer ads, but in general the two are correlated.)

The X factor here is jobs: Ad agencies are still laying off hundreds of workers; that's a reflection of their larger clients, which are laying off even more (Pfizer recently announced it will sack 19,500 people, for instance). More unemployed people means less consumer spending. Less consumer spending means lower sales for advertisers. And lower sales means less advertising. The unanswered question is, Are companies starting to increase their marketing again? Or are we merely stopped at a landing on a still-descending staircase?