Want to know how the economy is doing? Follow advertising spending
By Robert Grede, for SBT
Someone once said that economics is the merging of finance and fortune telling.
I believe economists might be better at predicting the economy if they watched the advertising industry.
Predicting the US economy has become big business, with Wall Street gurus and Wharton business geeks madly analyzing everything from warehouse inventories to skirt length.
They push pencils and erasers with equal abandon, run complicated computer scenarios, and hang on every word of Federal Reserve Chairman Alan Greenspan. Then they wager fortunes on the whims of a fickle public.
Leading economic indicators are used to forecast the overall health of the economy or to predict the financial markets. Examples include annual inflation, prime interest rates, unemployment figures and inventory levels. They are, at best, a reasonable guess when the economy is headed for trouble, or ready to rebound.
Bob Phelps, principal at Oarsman Capital, is a seasoned investment advisor who has weathered ups and downs in the markets with equal interest.
"One indicator we use is the spread between corporate bonds and U.S. Treasury bonds," says Phelps. "As that gap narrows, it signals a better economic environment. Likewise, we get cautious if it widens."
Phelps recommends to his clients that they maintain a balance across all sectors. "It is the best way to diversify a portfolio," says Phelps. He then recommends an emphasis on certain sectors as conditions warrant. "For instance, in the technology sector, we watch the Korean stock market. It’s highly dependent on technology. If it looks positive, we may recommend our clients commit more heavily to the technology sector."
Phelps is paid to understand leading indicators, and I have every confidence that he, like many stock portfolio managers, has developed a handful of leading indicators that successfully serve him and his clients.
I asked him how often those indicators are wrong. "Sometimes," he admits. After further thought, he adds, "There is always an element of risk."
Truth is, despite all our best analysis and better intentions, those leading indicators don’t work nearly as well as economists might have you believe. If they did, there would be far less volatility in the markets, and businesses could predict their future sales with far better accuracy.
I think there is a better forecasting tool, one I have found amazingly accurate over the years, one that consistently predicts the rise and fall of our economy by about two to three months: the Advertising Industry.
Near the end of February, 2002, I received two phone calls in the same day from two different radio station sales reps. Each was offering package deals on unsold inventory.
Red flag!
After I hung up with the second caller, I immediately telephoned my stock broker and shifted a majority of my modest portfolio into cash. Sure enough, within six weeks, the market began to drop.
Advertising is typically one of the first budget cuts a company makes when it senses a softness in the marketplace. Magazine and newspaper ad pages decline; radio and TV stations can’t sell their inventory.
While a magazine or newspaper can simply limit the number of pages it prints, TV and radio stations sell time. If you begin to see more public service announcements, beware! That station has not been able to sell out its commercial time.
Just as advertising declines as a recession is imminent, likewise, when the economy is about to pick up, industry suppliers begin to hear the phone ring.
Terry Sweet writes original music for radio and TV jingles and corporate meetings. "When I start to get busy, the economy follows within a few months," says Sweet, president of Terry Sweet & Associates. "It never fails. That’s when I start putting my money in the stock market."
As soon as TV and radio station inventory gets tight, as soon as I hear that freelance artists, photographers, voice talent and modeling agency telephones are beginning to ring, I know that advertisers are returning to the marketplace. The economy is about to rise.
Inevitably, the stock market is due for a climb; unemployment figures will drop; inventories will start to dwindle.
You don’t need to be a fortune teller to know the economy is heating up. The advertising industry may just be the best leading economic indicator there is.
Robert Grede, author of the best-selling "Naked Marketing – The Bare Essentials" (Prentice Hall) and several other books, is president of The Grede Company. Read his books online at www.thegredecompany.com.
Nov. 14, 2003 Small Business Times, Milwaukee
