Two-Thirds of Industrial Manufacturers 'Pessimistic' Over U.S. Economy

Two-thirds of U.S.-based industrial manufacturers are pessimistic about the U.S. economy over the next 12 months, according to the third-quarter edition of the PricewaterhouseCoopers LLP Manufacturing Barometer. Ninety percent of survey respondents believe that the U.S. economy declined in the third quarter, up 13 points over last quarter and a 70 point increase from those who felt negative about the U.S. economy the same time last year.
 
As for international prospects, the majority of industrial manufacturers (80%) believe that the global economy declined -only 13% view the world economy as growing, which is a fraction of the 81% who believed it was growing last year. Of those manufacturers who market their products abroad, 63% are worried about the prospects of the international economy over the next 12 months, a 36 point rise from last quarter.
 
Anxiety over faltering credit markets has spread the world over as economic concerns extend beyond the U.S. and impact global economies,"said Barry Misthal, partner and industrial manufacturing sector leader at PricewaterhouseCoopers. "Executives are more cautious than ever before and look towards the future with newfound fears and trepidation in the global economy."
 
U.S. manufacturers are scaling back growth projections for own-company revenue, forecasting a 2.8% average 12-month revenue growth rate in the third quarter -a 24% decline from the 3.7% growth projection stated last quarter. However, more than half of executives (54%) are planning for growth over the next year, with 16% expecting double-digit growth and 38% projecting single digit growth. Gross margins were higher for over a quarter (26%) of manufacturers in the third quarter. Coupled with increased costs (cited by 66% of respondents), over half (54%) of manufacturers raised their prices in order to offset the higher costs.
 
In terms of potential barriers to growth, the majority of manufacturers are now concerned about lack of demand (82%) and decreasing profitability (64%) over the next 12 months. This is a new development, as concern over oil/energy prices (cited by 62% of respondents) subsided as the top concern from the past year due to significant price decreases in crude oil over the past few weeks.
 
On the upside, 45% of respondents who market their products internationally reported an increase in sales from abroad and 42% retained the same level of international sales during the third quarter. However, this is off considerably from second quarter results, when 66% of manufacturers reported an increase in international sales. Over the next year, international sales are expected to contribute 32% to total revenues of those manufacturers selling abroad, down from 38% in the prior quarter.
 
"Declining international sales and higher costs are affecting manufacturers'long term investments, resulting in lower growth projections and limited spending for expansion and workforce additions,"explained Misthal. "Until concerns over demand and profitability subside, executives will continue to maintain a conservative stance on spending and keep a closer eye on their margins."
 
Plans for major new investments have curtailed, as only 34% of manufacturers are divesting capital for new expenditures over the next 12 months, down from last quarter's 50% and off from last year's 42%. However, more than half (64%) are planning operational spending increases, with the majority of investments spent on new product/service introductions and business acquisitions (both at 26%).
 
Anticipation for M&A activity also declined 8 points from second quarter results to 32% while plans for new strategic alliances (32%), new joint ventures (28%) and new facilities abroad (20%) increased from the previous quarter. Hiring plans also decreased, with only 12% planning new net hires and 40% of industrial manufacturers planning to reduce their workforce over the next year.
 
PricewaterhouseCoopers'Manufacturing Barometer is a quarterly survey about the business climate based on interviews with 50 senior executives of large, multinational U.S. industrial manufacturing companies. This survey summarizes the results for Q3 2008 and was conducted from August 8, 2008 through October 31, 2008. The full report is available here.