Optimism in Global Economies Continues to Grow Among U.S. Industrial Manufacturers
PricewaterhouseCoopers - 28 October 2009
NEW YORK - Optimism in the U.S. and global economies among U.S.-based industrial manufacturers is on the rise and a turnaround is expected over the next 12 months, according to PricewaterhouseCoopers' third-quarter Manufacturing Barometer report. While a majority of survey respondents continue to view the U.S. and global economies as unchanged or declining in the third quarter of 2009, their overall outlook on how things will be by the second half of 2010 indicates their overall optimism on recession recovery. For the past four quarters, an overwhelming majority of respondents viewed the economy as declining. In a turnaround this quarter, fewer industrial manufacturers are taking this view, with only 23 percent of industrial manufacturers interviewed believing the U.S. economy declined this quarter (down 40 points from last quarter's 63 percent). Also showing a hint of optimism, 13 percent believed the U.S. economy actually grew. On the world economy, only 25 percent continued to view it as declining, down 41 points from last quarter. Additionally, 29 percent view the world economy as growing, up 18 points over last quarter's findings. The overall outlook for the next 12 months shows a marked improvement in optimism. Looking ahead, 48 percent are optimistic about the U.S. economy's prospects and only 13 percent are pessimistic. This marks a decrease in pessimism over this time last year when 66 percent of respondents were pessimistic. Similarly, among those respondents doing business abroad, 45 percent of panelists are now optimistic about prospects for the world economy and only 13 percent are pessimistic. This is a stark contrast to what we saw a year ago, when 63 percent of these respondents were pessimistic about the world economy over the next 12 months. "The upswing of optimism regarding the economy reflects an important shift in perspective and growing confidence by manufacturing executives at both a U.S. and global level," said Barry Misthal, partner and industrial manufacturing sector leader at PricewaterhouseCoopers. "The improving hiring plans over the next 12 months, as well as for M&A activity and other major new investments of capital, are evidence of the industry's growing hope in an economic turnaround." Looking ahead at the next 12 months, 57 percent of panelists expect positive growth, with 12 percent forecasting double-digit growth, and 45 percent forecasting single-digit growth. The projected average growth rate is a plus 2.2 percent, notably better than the prior quarter's projected minus 0.4 percent. Although concern about market demand remained the chief barrier to growth over the next 12 months (75 percent, down 7 points), two other potential barriers rose sharply in Q3 - concern about legislative/regulatory pressures (58 percent, up 16 points) and taxation policies (53 percent, up 10 points). Decreasing profitability fears lessened slightly to 42 percent (down 8 points), although still high. On the positive side, capital constraints dropped off sharply to 22 percent as a potential barrier for growth over the next 12 months.
Plans for major new investments of capital over the next 12 months were notably higher at 37 percent, a jump over last quarter's 27 percent and slightly above last year's 34 percent. However, the level of projected spending dropped sharply from 6.2 percent to 3.9 percent of sales, indicating that while more are planning new capital investments, spending will take place at a lower rate than before. Looking at the next 12 months, over two-thirds of respondents (68 percent) plan to increase operational spending, rising 15 points over last quarter's 53 percent. The areas in which respondents anticipate focusing increased budget expenditures include new product or service introductions (40 percent), research and development (35 percent) and business acquisitions (33 percent). Industrial manufacturers planning for M&A activity over the next 12 months also rose sharply to 38 percent, focused primarily on intent to purchase another business. New strategic alliances remained high, as well (33 percent). Interestingly, plans to expand to new markets abroad dropped 12 points this quarter to 15 percent. While workforce reductions are still expected over the next 12 months, plans to hire have increased, and the rate of layoffs is notably lower compared with last quarter. Over the next 12 months, 25 percent of respondents plan to add workers (up 8 points from last quarter and more than double last year's 12 percent). Of the 25 percent planning to hire, the most sought-after employees will be professionals/technicians, white collar workers, and sales/marketing people. Twenty-eight percent of respondents plan to reduce the number of full-time employees, marking a 2-point dip from last quarter, and 47 percent expect to stay about the same. In Q3, international sales for U.S.-based industrial manufacturers selling abroad showed a slight improvement, as well. Panelists marketing abroad forecast an upturn in the contribution of international sales to total revenue over the next 12 months, up 4 points to 34 percent from the prior quarter's survey low of 30 percent. However, the 22 percent that reported an increase in sales abroad represent a lower number compared with a year ago (45 percent). The number reporting a decrease fell to 39 percent from 47 percent in the prior quarter. The survey also found that 40 percent of panelists reported gross margins up and 25 percent reported them down - a net 15 percent with higher margins. This figure marks the first positive net change since fourth quarter 2007 and a reversal of last quarter when a net 22 percent reported lower margins. Costs and prices remained lower as well in Q3 2009, with only 15 percent of U.S.-based industrial manufacturers reporting higher costs, while 43 percent reported lower costs. On the pricing side, only 17 percent raised prices, compared to the 27 percent that lowered them. Looking Past the Economic Crisis With all eyes watching for signs of a recovery, this quarter the Barometer asked executives specific questions to learn what is on the minds of the panelists as they try to position themselves for a successful outcome. While many economic forecasters predicted a recovery - a stabilization of the U.S. economy - during fourth quarter 2009, most senior executives of industrial products manufacturing companies expect their own organization to regain strength later. Only 7 percent of panelists expect their organizations to recover from the recession by the end of 2009. However, 68 percent expect their business to recover by the end of 2010 - with 23 percent predicting it will happen in the first half of the year and 45 percent in the second half of the year. Overall, three-fourths of respondents expect to have recovered by the second half of 2010. Despite the optimism shared by the majority, 17 percent believe their organizations are unlikely to recover until 2011. As industrial manufacturers prepare for recovery in 2010, respondents identified three critical areas they believe will be important to leverage: operational efficiency/cost reduction; supply chain management; and finances, working capital, and liquidity. Talent management and distribution ranked high, as well. In retrospect, based on what these senior executives have learned during the recession, 42 percent believe their companies should have focused more on mergers and acquisitions, 40 percent said focus belonged on new products and services, and 30 percent believed more attention should have been devoted toward research and development. This group of industrial manufacturing executives said more thorough planning in those areas would have allowed them to better cope with today's economic environment. PricewaterhouseCoopers' Manufacturing Barometer is a quarterly survey based on interviews with 60 senior executives of large, multinational U.S. industrial manufacturing companies about their current business performance, the state of the economy and their expectations for growth over the next 12 months. This survey summarizes the results for Q3 2009 and was conducted from 17 July 2009 through 12 October 2009. PricewaterhouseCoopers has more than 163,000 people at member firms providing assurance, tax, and advisory services to clients in 151 countries worldwide. PwC release
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