Overview Of U.S. Economic Outlook

S&P Global economists revised their 2023 and 2024 forecast and expect growth will cool off in 2024 but not enter a recession (see "Economic Outlook U.S. Q1 2024: Cooling Off But Not Breaking", published Nov. 27, 2023).

We believe there are many reasons the resiliency of consumer-led GDP growth will be tested in 2024. First, expenditures on services is now back to its pre-pandemic trend, leaving little in the way of post-pandemic catch-up demand. Second, household spending is poised to be more in line with real income growth as the firepower from excess cumulative savings has dwindled. Third, there are signs that consumers are starting to feel the squeeze in their debt servicing capacity. According to the New York Fed and Equifax credit data, there was a significant increase in the percentage of consumer loans that tipped over into serious delinquency (unpaid for 90 days or more) in the third quarter of 2023. Given we anticipate interest rates will remain meaningfully elevated in 2024 (relative to the last monetary cycle), we believe there will be a further rise in delinquency rates, especially since student loan repayments have now resumed (starting October); this will likely push up debt servicing costs further and weigh on consumption at the margin.

Our revised forecast

U.S. GDP growth:   We now expect the U.S. economy will expand 1.5% in 2024 on an inflation-adjusted annual average basis (up from 1.3% in our September forecast) and grow 1.4% in 2025 (unchanged from our September forecast), before converging to the longer-run sustainable growth of 1.8% in 2026.

Consumer spending:   This is more closely correlated with advertising spending than GDP. We therefore expect consumer spending will grow 1.8% in 2024 and 1.6% in 2025, modestly ahead of GDP growth.

Unemployment:   Given our view that economic growth will slow materially, we expect payroll employment to contract starting sometime in late spring of 2024. We expect the unemployment rate will rise through 2024 before peaking at 4.6% in 2025.

Inflation:   We forecast core inflation finally falling closer to levels consistent with the Fed's target of 2.0% on a sustained basis by the middle of 2024.

The Fed:   We anticipate policy rates will land at 4.6% and 2.9% by the end of 2024 and 2025, respectively.

Table 1

Digital Advertising Has Recovered...

After a year of weak global advertising spending due to geopolitical events and fears over a potential macroeconomic recession (which has yet to materialize), we believe advertisers resumed spending in the second half of 2023. As a result, we raised our estimate for overall 2023 U.S. advertising growth by 130 basis points (bps) to 3.7% (up from 2.4% in our July 2023 forecast).

We estimate digitally focused media platforms--including search, streaming, social media, digital commerce, retail media networks, and connected TVs--grew 10.5%. This is an increase from our July forecast of 8.5% growth.

...Legacy Advertising Has Not

In contrast, spending on legacy media (TV, radio, and print) remains weak. We estimate legacy media advertising declined 8.5% in 2023, with total linear TV (broadcast and cable) down 10.8%. This number is skewed by lower political advertising compared to 2022.

We expect only modest improvement in core advertising on legacy media platforms starting in the second half of 2024. Linear TV will report stronger top-line growth due to our expectations for record advertising given the presidential election year and the Paris Summer Olympics.

Our Expectations

Performance-based advertising will continue to outperform brand advertising.

Companies have pulled back more on brand advertising over the last year and increasingly shifted their spending toward performance-based advertising as they look to use advertising budgets more efficiently. These campaigns are more data-driven, and we think they are more likely to result in a customer response. Similarly, national advertising has been more challenged over the last year, while local advertising has performed better due its greater focus on direct response marketing.

The secular shift of advertising away from traditional media will continue.

We believe secular pressures, more than macroeconomic cyclical trends, are the main contributors of continued soft advertising spending on legacy media platforms. Advertisers are finally abandoning linear TV. While audiences have been leaving U.S. linear TV for quite some time, advertisers have been slower to follow because the available impressions and unique viewers on all ad-based streaming services remain too small to make buying on streaming platforms efficient.

In addition, ad-based streaming services must still solve several major structural issues, especially a lack of industry standards (audience measurement, buying, etc.) between the streaming services, before advertisers more fully embrace advertising on streaming. Still, as new free ad-supported channels and ad-supported tiers of streaming platforms grow and create more ad inventory, they could further dilute linear TV advertising pricing and shift ad dollars away from linear TV.

We expect little visibility into forward advertising trends.

Digital (now making up about 70% of total U.S. advertising) and radio advertising are characterized by short lead times. This has been exacerbated by advertisers' caution in committing to spending because they are concerned about potential macroeconomic weakness. The uncertainty has extended to the U.S. TV sector, which faced both uncertainty amid the weak macroeconomic forecast and Hollywood strikes. As a result, advertisers were reluctant to make early commitments in the 2023-2024 U.S. TV season upfront (for nonsports ad inventory); instead, they looked to delay commitments to the scatter market.

Table 2

Digital Advertising: The Growth Engine For The Advertising Ecosystem

We forecast U.S. digital advertising revenue will increase at 10.2% in 2024, reflecting stabilizing global macroeconomic growth, albeit at a modestly slower rate than in 2023. Digital was the first ad sector to slow in 2022 and the first to recover starting around the middle of 2023. Digital video and retail media networks will be the fastest expanding subsegments because both benefit from the continued shift to online shopping, digital video consumption, and connected TV and better demographic targeting provided by video on demand viewing.

We expect growth will moderate to 8.5% in 2025 primarily due to slowing social media advertising. Within the digital category, our growth forecasts for 2024 for search, social, and digital video are 9.5%, 11%, and 15%, respectively.

Chart 1

Legacy Media Will Benefit From 2024 Political Campaigns Despite Secular Declines

Television advertising

We expect linear TV advertising will remain challenged in 2024 because of the secular challenges discussed above. Not surprisingly, we view national TV advertising as the most exposed to these secular trends, especially on general entertainment and lifestyle networks. We believe local TV advertising faces less risk of losing advertisers to digital platforms than national TV advertising because local advertisers have limited options to reach broad local audiences.

National TV:   We forecast national television advertising will decline 0.8% in 2024, 150 bps weaker than our previous forecast of 0.7% growth. We expect cable network advertising will decline 4% and for broadcast TV advertising to grow 6.7%. We assume cable's weakness will be due to rapidly declining audience ratings, which puts downward pressure on inventory prices (defined as cost per thousand viewers [CPMs]). The cable networks have limited ability to reverse this trend because, except for sport-focused networks, they lack the sports programming to draw in and retain audiences.

Broadcast TV's growth is due to the Paris Summer Olympics (we estimate $1.8 billion in advertising revenues). Excluding the Olympics, we expect a 6% decline in core broadcast TV advertising. While not in our base case, broadcast TV advertising may benefit from the return of the broadcast season in the first quarter of 2024. We believe national TV will increasingly become a tale of have's and have-not's--those broadcast and cable networks that have a strong stable of sports, particularly the NFL, and news, especially in a Presidential election year, and those that don't. Those networks with sports programming will be able to not only demand higher CPMs for their sports ad inventory but also sell more nonsports ad inventory as they will bundle their sports and nonsports inventory to advertisers.

General entertainment and lifestyle cable networks are experiencing significant advertising weakness with both weak demand and lower prices. These networks have suffered the biggest audience declines as media companies have prioritized putting new original content on their streaming services instead of their linear TV networks. In addition, these networks were disproportionately hurt by the writers' and actors' strikes, which have resulted in a lack of original content and delayed the 2023-2024 TV broadcast season.

Live sports programming, either on sports networks like ESPN or broadcasters carrying the NFL and college football, will continue to see strong demand from advertisers. This is not surprising because as audience ratings for general entertainment continue to slide by over 20% year over year, audience ratings for the NFL keep increasing. Through week 10 of the NFL season, total audience ratings for the NFL are up about 6%. We believe the linear TV networks have limited advertising inventory for sports programming and are able to charge higher prices. As a result of these higher prices, TV advertising budgets have been drained, leaving less money to be spent on general entertainment networks.

Local TV:   We no longer expect core advertising to grow in 2024 and lowered our 2024 forecast by 400 bps to a 2% decline given ongoing pressures in large markets. Large markets underperformed small markets in 2023, since they can behave more like national markets; we expect it will take longer for national advertising to improve as larger advertisers continue to hold back spending amid a challenged macroeconomic environment.

Local advertising in smaller markets largely held up in 2023 as consumers continued to spend and advertisers focused on bottom of the funnel campaigns. While we believe advertising spending will improve in the second half of 2024, we believe it will be difficult for local TV to benefit due to meaningful crowd-out from political advertising. We expect local TV will continue to benefit in 2024 from the resurgence in automotive advertising as inventory continues to build, although it could take several years for the category to recover to pre-pandemic advertising spending levels.

The automotive category remains an important category for local TV, contributing 20%-25% of advertising revenue prior to the pandemic. To the extent that local TV acquires additional local sports rights, it could provide modest upside to our current advertising forecast. Those local TV broadcasters that acquired local sports rights in 2023 cited an incremental lift to their core advertising revenues.

Given the intense political climate in the U.S., we expect 2024 will see record political advertising for local TV exceeding that of 2020 (despite the benefit from the Georgia run-offs in 2020). We are also seeing increased spending on political issues, in addition to political candidates. We continue to believe TV is more attractive than other forms of media for political advertisers given its significant reach and ability to target voters in select districts.

Radio advertising

We lowered our 2024 radio advertising forecast by 150 bps to a 1.5% increase. That said, it is difficult to determine at this point the timing and magnitude of an improvement in radio advertising after significant declines in 2023. Radio advertising has some of the shortest lead times in media, which gives us scarce visibility into future performance. We believe lead times have further compressed and radio companies now only have a few weeks to a month of visibility.

It is our belief that greater visibility into any improvement in radio advertising trends is unlikely until the second quarter of 2024. We believe the first quarter of 2024 will be weak, with both economic and secular challenges on top of what is typically already a seasonally low quarter. Despite an expected improvement in the second half of 2024 amid improving macroeconomic conditions, we expect more than a 10% haircut in radio advertising spending compared to pre-pandemic levels.

Outdoor advertising

We modestly lowered our 2024 outdoor advertising forecast by 50 bps to 4%. The recovery in transit ridership and transit advertising from the pandemic largely stalled in 2023, and we do not expect any material improvement in 2024. Local advertising held up better than national advertising in 2023, and we expect this trend will continue through the first half of 2024. We expect an improvement in national advertising in the second half of 2024 will lead to a step up in the industry's growth.

The industry's conversion to digital billboards from static reduces the time needed to place an ad, allowing companies to quickly book business as economic conditions improve. At the same time, we continue to believe outdoor advertising remains an attractive way to reach consumers given its captive audience of drivers, commuters, and pedestrians.

Downside Risk To Our Advertising Forecast

We believe there is greater downside risk to our 2024 advertising forecast than upside potential. For instance, lower economic growth could stall any improvement in legacy advertising. Additionally, advertising spending is highly dependent on key periodic macroeconomic indicators (GDP, consumer spending, employment, etc.). Therefore, persistently high inflation and higher-for-longer interest rates could more quickly deplete consumer savings, weaken consumer discretionary spending, and delay any improvement in legacy advertising spending.

Lastly, audience declines for linear TV could worsen. The shortened 2023-2024 TV broadcast season may have permanently decreased audience ratings, which may accelerate advertising dollars moving off of TV and depress CPM pricing.

Ratings Implications

We expect our ratings on most advertising-dependent companies to remain stable in 2024 despite our anticipation that real global economic growth will remain weak for the next two years. In part, this is because we already took numerous rating actions over the last 18 months as advertising revenues for legacy media weakened and thus far failed to improve.

We both lowered ratings and revised outlooks on most advertising-dependent media companies. In particular, we lowered our ratings on U.S. radio companies whose advertising revenues continue to decline and on digital programmatic advertisers with significant exposure to economically challenged verticals, including mortgage refinancing, insurance, and retail.

We expect credit metrics of ad-based companies will gradually strengthen in 2024, especially if, as we expect, advertising on legacy media improves in the second half of 2024. Those companies that earn political advertising revenue will also benefit from the presidential election.

We assume most media companies will remain focused on controlling costs, and so we expect slower growth in wages (which accounts for about 65% of operating costs) as inflation gradually eases. We believe improving cost efficiency due to technological advancements and completion of restructuring and cost-saving programs will also allow companies to invest in tech and data capabilities without materially weighing on profits.

Related Research

• Economic Outlook U.S. Q1 2024: Cooling Off But Not Breaking, Nov. 27, 2023
• That's All, Folks: Key Takeaways From Media And Entertainment Q3 Earnings, Nov. 22, 2023
• Credit FAQ: Increasing Static Around U.S. Broadcast Radio's Recovery Prospects, Nov. 14, 2023