How Ad Agency Revenues Can Be Used to Predict Recessions

Last Updated Nov 8, 2010 3:42 PM EST

The organic revenue growth of large ad agency holding companies follows GDP growth, giving managers an interesting signal to look for in terms of predicting where the economy is headed. That corporations spend more on ads in boom times than they do in recessions isn't surprising, but it is nice to see that suspicion confirmed in the form of a chart.

This graph shows GDP growth plotted against organic revenue growth (i.e. "like-for-like" growth, which excludes acquisitions) at WPP (WPPGY), the largest ad agency holding company on the planet, and Omnicom (OMC), the largest U.S. holding company. WPP owns agencies such as Ogilvy & Mather and Young & Rubicam; Omnicom owns BBDO and DDB. They earn revenues by taking fees and commissions on all the ads they create and place for a wide variety of consumer-oriented companies:


Source: About.com's GDP current statistics; company reports.*
It's interesting for two reasons. First, remember that actual GDP is a difficult number to calculate, and the Bureau of Economic Analysis only issues a final, definitive measure of economic growth three months after the quarter ends. (I've used the Q3 2010 number, which isn't out yet, from this estimate.) By contrast, Omnicom and WPP report their revenues promptly. So even though revenues at Omnicom and WPP went into decline one quarter after that of GDP, as we headed into the recession in 2008, you could have gotten an idea where the economy was headed sooner if you had looked at their numbers rather than wait for the GDP number.

Second, while the advertisers' sales closely tracked GDP's decline, they were much slower to recover when growth returned in 2009. The decline in spending was about one quarter behind the decline in economic growth, but more than two quarters behind the increases in economic growth. That suggests managers are quick to pull in their marketing horns when they see sales declining, but slow to take advantage when sales go back up again.

A smart brand manager should therefore ramp up their ad budget at the same speed he or she retracted it in order to take advantage of the fact that their competitors will be about one quarter behind them in their decision to do likewise.

*Caveat: The numbers for the companies' Q4 periods are actually their full-year numbers taken from the companies' 10-K filings. So these stats should be seen as a rough approximation of their growth, and are not completely accurate.
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