U.S.-based industrial manufacturers are expecting revenue growth to turn negative over the next 12 months, according to the fourth-quarter edition of the PricewaterhouseCoopers LLP Manufacturing Barometer. For the first time since the Barometer’s inception in the third quarter of 2003, more manufacturers are preparing for negative growth (33%) than those expecting positive revenue growth (25%). Meanwhile, another 34% are expecting zero growth.
 
In the year ahead, manufacturing executives anticipate a sharper year-to-year drop-off in revenues, down to an average of -2.4%. Just one year ago, survey respondents forecasted a mean revenue growth of +5.4%.
 
For the first time in the Barometer’s history, industrial manufacturers are expressing significant concern over future revenue growth as worldwide markets face a recession and international sales continue to drop, said Barry Misthal, partner and industrial manufacturing sector leader at PricewaterhouseCoopers. “Their pessimism over revenue figures is being echoed in their anxiety over both the domestic and international economies, as global confidence levels reach an all-time low.”
 
The survey found that nearly all respondents (98%) believe that both the U.S. and global economies declined last quarter. In addition, the majority of industrial manufacturers are pessimistic about their prospects over the next year, with 70% gloomy about the domestic economy and 69% negative about their international prospects.
 
For industrial manufacturers marketing abroad, international sales decreased in the fourth quarter, with only 28% reporting an increase and nearly half (44%) reporting a decrease. Even though the majority of international sales turned negative, the expected contribution of international sales to total revenues over the next 12 months remained high at 37%, an increase from last quarter’s 32%.
 
Looking ahead over the next 12 months, lack of demand was cited as the chief potential barrier to growth by 85% of respondents, up three points from the third quarter. Meanwhile, decreasing profitability remained the second highest concern, cited by 62% of executives.
 
Also of note, worries about capital constraints rose 11 points in the fourth quarter and was identified as a chief concern for 37% of manufacturers. Concerns over oil/energy prices were cited by only 25% of manufacturing executives, due to the significant decline in commodity prices as crude oil dropped to $35-$40 per barrel.
 
The sharp decline in commodity prices, along with slashed interest rates, may signal the end of the cost-price spiral among industrial manufacturers. During the fourth quarter, only 25% of executives reported increased costs, compared to 66% in the prior quarter.
 
In addition, more firms are reporting decreased costs (32%) and only 15% of manufacturers had to raise prices in Q4, compared to 54% in the third quarter.
 
“Industrial manufacturers may be able to take advantage of this period, when costs and interest rates are at all-time lows. However, a deflationary marketplace can also be detrimental to margins, so executives will need to hold their price points and continue to drive sales in order to stay successful,” said Misthal. “Currently, there is a significant slowdown in industrial activities everywhere – in both developed and emerging economies – making it important for manufacturers to continue to harness international sales to remain competitive.”
 
Plans for major new investments of capital remained on pace with last quarter at 33%. The majority of respondents (57%) plan to increase operational spending over the next 12 months, with most focusing on geographic expansion (30%) and information technology (28%). Plans for M&A activity are consistent with last quarter (32%), as was specific focus on expansion to new markets abroad (32%).
 
Given the current financial environment, hiring plans remain minimal, with only 10% of manufacturers adding new hires. In addition, 35% of respondents plan to reduce their workforce over the next 12 months, with most of the layoffs affecting production workers and white collar support jobs.
 
PricewaterhouseCoopers’ Manufacturing Barometer is a quarterly survey based on interviews with 60 senior executives of large, multinational U.S. industrial manufacturing companies. This survey summarizes the results for Q4 2008 and was conducted from Nov. 7, 2008, through Jan. 16, 2009. The full report may be found here.