For decades, a decline in local advertising was an early warning sign of an upcoming recession, with local ad sales typically declining as much as a year in advance of national ad sales. The reason is clear; national ad campaigns take a lot of time and money to prepare and monitor. Local businesses (think of your local car dealer or supermarket), on the other hand, are quick to feel a decline in revenues and can simply pick up the phone and cancel all upcoming advertising.
However, the times they are a changing. Digital ad sales declines may now become the early warning sign that we are about to enter the next economic slump. That’s the view of many on Wall Street after Snap’s CEO on May 23 surprised many analysts with a bearish outlook on ad sales for Q2, something which is likely to be announced at other online companies relying heavily on advertising sales such as Alphabet
Speaking at JP Morgan’s 50th Annual Global Technology, Media and Communications Conference 2022 on May 23 in a Q&A Session with JPMorgan Chase & Company Managing Director and Internet Analyst, Snap Co-founder, CEO & Director Evan Spiegel admitted that the previous outlook of 20-25% revenue growth in ‘Q2 was out the window.
“Well, the macroeconomic environment has definitely deteriorated further and faster than we expected when we issued our guidance for the second quarter. So even though our revenue continues to grow year-over-year in the second quarter, it’s likely that revenue and EBITDA will come in below the low end of our guidance range, ”said Spiegel. SNAP closed down 43% at $ 12.79 and now trades at 15% of its 52-week high of $ 83.34 on 09/24/21.
Spiegel ited a number of negatives impacting ad sales, including supply chain issues, inflation, concerns about interest rates, amongst other issues.
In the last economic recession, declining digital ad sales were not an early warning of a recession. In what is now referred to as the “Great Depression” (measured from December of 2007 to June of 2009), the data shows that local ad sales actually dropped by more than 3% in 2007 while national ad sales rose by more than 2% .
Both national (-4%) and local (-9%) fell in 2008, with 2009 being a terrible year for both segments of advertising, with local cratering almost 21%and national falling by 14%. But as Wells Fargo
And in fact there was a trend of digital ad sales falling rapidly going into 2020, but it wasn’t signaling a full-on recession. Rather, both local and national ad revenue fell 7% in 2020, and although digital took a significant downturn (rising only 2.4% in 2020 after a pop of +23% in 2019) it was up for the full-year.
Another analyst put out a report that also signaled the SNAP warning could be bad news for the economy in general. Mark Mahaney, an analyst at Evercore
In fact, we are long overdue for a recession, which typically happens about every 10 years. And although it’s getting increasingly more likely, most economists don’t think it will be as long and as deep as the last recession. More than half of the economists and other experts surveyed by the National Association of Business Economics say the risk of a downturn within 12 months is greater than 25%.
Goldman Sachs economists are more sanguine about the economy, but still they put out a manual for Clients on how to prepare for an economic downturn. “A recession is not inevitable, but clients constantly ask what to expect from equities in the event of a recession,” wrote chief US equity strategist David Kostin as the report was released on May 19. Goldman Sachs pegged the risk of recession at 35% in the next two years.