When the economy gets worse, companies cut their advertising budgets. This truism has played out throughout the last year as economists have nagged about a potential US recession.
Companies dependent on advertising revenue, including some of the largest firms in Silicon Valley, have felt the brunt of this pull-back. After experiencing 25% growth in 2021 fueled by pandemic internet usage, the US digital ad market grew less than 10% in 2022, according to data shared with Quartz from the market research firm Insider Intelligence. This pace of growth is more in line with pre-pandemic numbers. Meta, the parent company of Facebook and Instagram, even saw 3% declines in that period, a wake-up call that the pandemic joy ride was over.
In 2022, the tech sector laid off 150,000 workers due partly to declining ad revenue, and the highly ad-dependent news media industry laid off nearly 4,000 more. In the latest jobs report from the US Bureau of Labor Statistics, which reported falling unemployment numbers across the economy, the “information” subcategory, which includes media and tech, saw a net loss of 5,000 jobs.
But recession fears seem overblown: Unemployment numbers are at historic lows, inflation is finally starting to ebb, and the stock market is performing better than it has in recent months. So will advertising revenue return soon? And if it does, will media and tech companies bring back the jobs they cut?
Recession fears are abating
A rash of economic data in the past few weeks shows the US headed toward shrinking inflation with no recession. The consumer price index has fallen from 9.1% in June 2022 to 6.5% in December even while the unemployment rate remains at 50-year lows. Wages continue to decelerate as well, even as the US added half a million jobs in January.
With a labor market that’s much stronger than economists had realized and inflation easing for reasons outside of interest rate hikes, it’s all the more likely the Fed will not tip the economy into a recession. But some industries might feel like a recession is coming: US consumer spending is concentrating on services rather than goods, leaving many retailers and manufacturers feeling the pinch.
Similarly, tech companies dependent on sky-high valuations to access cheap capital are feeling the pain of a bear stock market. But they’re also feeling the burn from retail and other industries that have been spending less on marketing.
Despite a dip in job openings in the tech sector, laid-off tech workers are bouncing back quickly and finding employment at a faster pace compared to before the pandemic, according to economists at Goldman Sachs. This may be because overall US job openings grew in December.
The tech layoffs are not recessionary because tech increased its headcount 41% above its pre-pandemic levels versus the 2% job growth the rest of the economy has seen, the Goldman economists said.
Advertising will return to earth in 2023
Advertisers braced for impact, but their worst fears have largely diminished.
“We are operating under kind of a soft landing scenario,” Andrew Lipsmann, a principal analyst at Insider Intelligence, said in an interview. “Things have to pull back to more normal levels coming off of two years of crazy growth from the pandemic. So it’s kind of like a rationalization. I think some of the worst fears of this significant ad recession—that negative outlook—seem to be improving.”
Advertisers feel caught in a difficult inflationary period when consumers still feel their dollar isn’t going very far, but inflation is easing, Nikhil Lai, a principal analyst at the market research firm Forrester, told Quartz in an email. But, he added, “as inflation continues to abate, particularly in the second half of 2023, consumers’ confidence will resurge, and the ad economy’s outlook will improve.”
However, when advertisers cut their marketing budgets, the last thing to go is referred to as “performance”—these are platforms where companies feel they can spend to get something tangible, like a click-through to a website or an online sales conversion. Performance marketing typically involves ad platforms tied to Google, Facebook, and Amazon, the three largest firms in the digital ad sector, which combine for 60% of total market share, according to Insider Intelligence.
When ad budgets return, smaller social media platforms like Snapchat, Twitter, Pinterest, and Reddit—which advertisers use more for brand awareness campaigns—might have a harder time recouping their shares of the pie, especially as TikTok has surged in popularity for users and marketers looking for cultural reach. With an estimated $50 billion in revenue in 2022, TikTok has grabbed about 2% market share, about double what Snap and Twitter account for. The struggles have been accentuated by Apple’s privacy changes, which limit how app-makers can track user data, vital for platforms trying to prove their worth to advertisers.
“The triopoly of Alphabet, Meta, and Amazon will fare well and the walls of their walled gardens will heighten as consumers’ confidence resurges,” Lai wrote. The smaller platforms, which have also made severe layoffs—Snap with 20% of its workforce in August, Pinterest with 5% in December, and Twitter slashing most of its staff under Elon Musk—might not fare so well in recouping ad revenue the rest of the year.
The news media industry is in an even more tenuous position. Publishers such as CNN, Gannett, BuzzFeed, The Washington Post, and Vice have all announced layoffs while websites including Protocol and the revamped version of Gawker shut down in recent months.
News websites are among the “most vulnerable” ad-sellers right now, Lipsmann said, though he said it’s one of the most “undervalued contexts” for displaying ads. “Good quality brand advertising experiences in a good context—ads on premium news publishers, ads on Pinterest” are very effective for improving an advertiser’s own image. Marketers, he says, have focused too much on performance and metrics and not nearly enough on the quality of where they’re placing their ads.
Layoffs follow pandemic staffing booms
It’s not a sure thing that ad-supported media and tech companies will rehire for all of the positions they eliminated during layoffs in 2022. Some of that, analysts say, is (to use a tired cliche) right-sizing after inordinate hiring at the height of the pandemic.
Tech CEOs such as Meta’s Mark Zuckerberg have said they believed the pandemic wasn’t a bubble, unnaturally inflating online activity, but an accelerant to an inevitable level of use that we were always destined for. That hasn’t panned out. Meta laid off 13% of its workforce in November—or 11,000 workers—but the company’s headcount is still up 20% for 2022 after the mass reduction, according to the company’s recent earnings report.
“It’s people’s livelihoods at stake and there are jarring numbers of layoffs, but some of these companies doubled their staff and they’re laying off maybe a quarter of all net new hiring,” Lipsmann said. “In the grand scheme of things, they’re still way out ahead of where they were previously.”
A previous version of this article incorrectly said The Recount shut down. The news company was set to suspend operations, but has since sold to a new owner and will continue publishing.