Landmark Study: The Economic Impact of Advertising Expenditures in the U.S.
October 14, 2010
As the nation continues to lift itself out of the longest recession since the Great Depression, a new study underscores the power of advertising to stimulate job creation and economic growth.
The Advertising Coalition (TAC), a group of leading trade associations, media and marketing companies committed to reinforcing the value of advertising as an engine of economic growth and job creation, commissioned the comprehensive study, The Economic Impact of Advertising Expenditures in the United States. The study, conducted by IHS Global Insight, Inc. for The Advertising Coalition, was released at the 2010 annual "Masters of Marketing" conference of the ANA (Association of National Advertisers). Among the TAC members, the following organizations contributed to the IHS Global Insight Study: ANA (Association of National Advertisers), 4A's, Newspaper Association of America (NAA), National Cable and Telecommunications Association (NCTA) and Pharmaceutical Research & Manufacturers of America (PhRMA). The study assesses advertising's economic impact across 52 industries, plus government, in every state and Washington, D.C., as well as in each of the 435 U.S. Congressional Districts.
This landmark study highlights the sales activity and the jobs created in the United States that are stimulated by advertising. The economic model developed by IHS Global Insight and Dr. Lawrence R. Klein, recipient of the 1980 Nobel Prize in Economics, estimates and predicts the importance of advertising on sales and jobs as distinguished from the importance of other market factors such as consumer buying power, life stage buying behaviors, technological advances, and simply the need to replace obsolete and depleted items.
This study demonstrates that advertising expenditures account for $5.8 trillion, or 20 percent, of the $29.6 trillion in U.S. economic output, and they support $19.8 million, or 15 percent, of the nation's 133.4 million jobs. Each form of advertising, ranging from direct mail to print to broadcast to Internet, helps businesses build brand awareness and communicate the benefits of their products and services to target audiences. This, in turn, triggers a cascade of economic activity and stimulates job creation and retention throughout the U.S. economy.
The goal of this study is to quantify the levels of sales and employment that are attributable to the stimulative effect of advertising. The economic impact of advertising consists of advertising expenditures, resulting sales, supplier sales, and inter-industry sales. Each of these effects also creates and maintains new jobs that are needed to support a higher level of production.
In summary, IHS Global Insight found that in 2010:
- Businesses spend $279 billion on advertising.
- Every dollar of ad spending generates just under $20 of economic output.
- Every million dollars of ad spending supports 69 American jobs.
Theory, Data, and Methodology
Companies in every industry use advertising to establish and reinforce brand awareness, promote their products and services, and, ultimately, stimulate increased revenues. Higher sales levels trigger additional economic activity throughout a company's supply chain, its suppliers' supply chain, and so on. This, in turn, leads to enhanced levels of job creation and retention. To quantify the economic impact of advertising expenditures on the U.S. economy, this study:
- Estimates the total level of advertising spending in the United States and creates a five year forecast.
- Allocates advertising spending to every state and congressional district based on IHS Global Insight's knowledge of macroeconomic, industry and regional data.
- Estimates sales impacts and employment impacts based on econometric models that quantify the relationship between ad spending and resulting sales.
- Accounts for the ripple effect of economic activity that occurs as the result of advertising spending.
Consider the following characteristics of advertising:
- Advertising is a more cost-effective and timely mechanism for distributing information about prices and beneficial changes in technology and product design than are individual searches for that information.
- The wide dissemination of product price information encourages lower prices and less variation in prices as suppliers strive to attract customers.
- Advertising may speed the implementation of new technology.
- Advertising may encourage greater economies of scale in the production process by allowing individual firms to attract a wider array of customers.
Advertising provides useful information to consumers in households and businesses and plays an important role in a market economy. This was shown in another study prepared for The Advertising Coalition, "Economic Analysis of Proposed Changes in the Tax Treatment of Advertising Expenditures," by Kenneth J. Arrow, George G. Stigler, Elisabeth M. Landes and Andrew M. Rosenfeld. Advertising's role is to inform and educate consumers about the choices available to them in the marketplace.
A concise definition of each level of impact follows:
The advertising expenditures incurred throughout the economy by businesses in all industries and all geographic areas set off a chain reaction that (1) generates a net gain in direct sales and jobs due to the promotion of the industries' products and services, (2) generates indirect sales and jobs among the first level suppliers to those industries that incur the advertising expenditures, and (3) generates indirect sales and jobs among all other levels of economic activity as interindustry sales ripple throughout the economy.
Retail and Manufacturing - The first and broadest level includes sales of products and services by manufacturers, retailers and their sales people and employees. This first tier of economic activity also includes the preparation of advertising that businesses use to communicate with consumers. It includes the work of advertising agencies as well as the purchase of advertising time and space on radio and television stations, cable operators and networks, in newspapers, magazines, and other outlets.
Suppliers to Retail and Manufacturing - As the advertising generates sales, it sets off chain reactions throughout the economy that create additional jobs and sales, as a second tier of vendors and wholesalers provide supplies and support to the first tier manufacturers, retailers, and service businesses. When advertising encourages consumers to purchase automobiles or trucks, for example, those retail and manufacturing level sales generate demand from suppliers of steel, electrical wiring, semiconductors, fabric and leather for upholstery, plastic, rubber for tires and parts, radio and GPS receivers and other products and services that are used to make the advertised product.
Interindustry Activity - Finally, advertising helps drive a substantial amount of sales and create jobs at a third level (called the interindustry level). In the automobile industry example, the manufacturing, retail and supplier level sales help generate economic activity and create jobs in a host of related industries such as rail and truck transportation, gasoline and oil, insurance, and after market sales of automobile products. Without the initial consumer purchases of the cars and trucks, there would be no demand for these third tier products and services and no added sales and jobs at the interindustry tier.
The Impact of Advertising on Sales and Employment
Advertisers have cut spending in the past few years in response to the recession. From the years 2002 to 2007, ad spending saw stable annual growth ranging from 3-7%, and five-year compound annual growth rates in the 3-5% range. Then in 2008, the annual growth of spending dropped 1.8%, followed by a further decline of 6.6% in 2009 and an expected 1.2% drop in 2010.
IHS Global Insight forecasts a recovery in ad spending beginning in 2011, with growth rates in the 3.5-4.5% range until 2014. This would represent a modest 2.9% compound annual growth rate in ad spending for the period 2009-2014.
The economic impact of advertising in each state is indeed large. Every ad dollar in 2010 generates $19.67 of additional economic output. At the same time, each million dollars of ad spending resulted in the creation of 69 jobs.
The study says that each dollar of ad spending generates, on average, $8.77 of additional sales. As a result of these sales, a ripple effect occurs as these firms buy additional inputs to production from their direct suppliers, and those suppliers buy inputs from their suppliers, and so on. This multiplier effect varies significantly by industry, but from a national perspective, the magnitude of the supplier and interindustry sales is roughly equal to the sales impact itself.
On average, advertising stimulates just under one fifth of total output in the U.S. economy. There is some variation of this share among states, which is explained primarily by the different industry composition of each state. The share of employment in each state is equally as impressive, with an average of 15% of jobs attributable to advertising activities and related sales.