Survey: Economic Turnaround Expected in Next 12 Months

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 the third-quarter 2009 PricewaterhouseCoopers LLP Manufacturing Barometer. 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% of industrial manufacturers interviewed believing the U.S. economy declined this quarter (down 40 points from last quarter's 63%). Also showing a hint of optimism, 13% believed the U.S. economy actually grew. On the world economy, only 25% continued to view it as declining, down 41 points from last quarter. Additionally, 29% view the world economy as growing, up 18 points over last quarter's findings.

Looking ahead, 48% are optimistic about the U.S. economy's prospects and only 13% are pessimistic. This marks a decrease in pessimism over this time last year when 66% of respondents were pessimistic. Similarly, among those respondents doing business abroad, 45% of panelists are now optimistic about prospects for the world economy and only 13% are pessimistic.

"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, industrial manufacturing sector leader at PricewaterhouseCoopers. "The improving hiring plans over the next 12 months, as well for M&A activity and other major new investments of capital, are evidence of the industry's growing hope in an economic turnaround."

Looking at the next 12 months, 57% of panelists expect positive growth, with 12% forecasting double-digit growth, and 45% forecasting single-digit growth. The projected average growth rate is a plus 2.2%, notably better than the prior quarter's projected minus 0.4%.

Although concern about market demand remained the chief barrier to growth over the next 12 months (75%, down 7 points), two other potential barriers rose sharply in Q3 – concern about legislative/regulatory pressures (58%, up 16 points) and taxation policies (53%, up 10 points). Decreasing profitability fears lessened slightly to 42% (down 8 points), although still high. On the positive side, capital constraints dropped off sharply to 22% 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%, a jump over last quarter's 27% and slightly above last year's 34%. However, the level of projected spending dropped sharply from 6.2% to 3.9% 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%) plan to increase operational spending, rising 15 points over last quarter's 53%. The areas in which respondents anticipate focusing increased budget expenditures include new product or service introductions (40%), research and development (35%) and business acquisitions (33%).

Industrial manufacturers planning for M&A activity over the next 12 months also rose sharply to 38%, focused primarily on intent to purchase another business. New strategic alliances remained high, as well (33%). Interestingly, plans to expand to new markets abroad dropped 12 points this quarter to 15%.

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% of respondents plan to add workers (up 8 points from last quarter and more than double last year's 12%). Of the 25% planning to hire, the most sought-after employees will be professionals/technicians, white collar workers, and sales/marketing people. Twenty-eight% of respondents plan to reduce the number of full-time employees, marking a 2-point dip from last quarter, and 47% 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% from the prior quarter's survey low of 30%. However, the 22% that reported an increase in sales abroad represent a lower number compared with a year ago (45%). The number reporting a decrease fell to 39% from 47% in the prior quarter.

The survey also found that 40% of panelists reported gross margins up and 25% reported them down – a net 15% with higher margins. This figure marks the first positive net change since fourth quarter 2007, as well as a reversal of last quarter when a net 22% reported lower margins. Costs and prices remained lower, as well in Q3 2009, with only 15% of U.S.-based industrial manufacturers reporting higher costs, while 43% reported lower costs. On the pricing side, only 17% raised prices, compared to the 27% 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% of panelists expect their organizations to recover from the recession by the end of 2009. However, 68% expect their business to recover by the end of 2010 – with 23% predicting it will happen in the first half of the year and 45% 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% 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% believe their companies should have focused more on mergers and acquisitions, 40% said focus belonged on new products and services, and 30% 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.

The Manufacturing Barometer is one in a series of quarterly business outlook surveys from PricewaterhouseCoopers. The survey provides a view on the 12-month outlook for revenue growth, new investments, new hiring plans, emerging business barriers and more. In addition to the business outlook, we hear from our panelists about special issues they face as the business climate changes.

For access to the complete Manufacturing Barometer report, please visit www.pwc.com/manufacturing. For more information about other Barometer surveys, including recent economic trend data and topical issues, please visit www.barometersurveys.com.