The latest edition of the PricewaterhouseCoopers LLP Manufacturing Barometer reports cautious optimism about the U.S. and global economies among U.S.-based industrial manufacturers.

 

In the fourth-quarter survey, nearly half (47%) of respondents are optimistic about the U.S. economy’s prospects, whereas only 5% were optimistic a year ago.  Similarly, 41% of panelists who sell internationally are optimistic about the prospects for the world economy, compared to only 4% a year ago.

 

Indicating a continued hint of optimism, 35% of panelists believed the U.S. economy grew in Q4 2009, up 22 points from the prior quarter. Only 15% believed it declined (down 8 points from the previous quarter), while the prevailing opinion (50%) was that the U.S. economy remained unchanged. In regards to the world economy, the most typical view was that it remained unchanged (46%) for the second straight quarter. However, 34% viewed the world economy as growing, a 5 point increase, while 20% believed it was declining.

 

Thirty-eight percent of industrial manufacturers that sell abroad reported an increase in international sales, up 16 points over last quarter. The number reporting a decrease in international sales fell to 22% from 39% in the prior quarter and is down significantly from the 60% reported in the first quarter of 2009.

 

Industrial manufacturers’ average revenue growth for calendar year 2009 ended with a double-digit loss (minus 11%), with only 20% reporting positive growth.  However, in sharp contrast, the majority (57%) forecast positive revenue growth for their own companies in 2010 – with 19% forecasting double-digit growth, and 38% forecasting single-digit growth. Only 13% forecast negative growth.

 

Looking ahead, 47% of respondents are optimistic about the 12-month outlook for the U.S. economy, similar to the prior quarter. Only 10% remain pessimistic, and 43% are uncertain. This level of cautious optimism is in sharp contrast to a year ago, when 70% were pessimistic. Similarly, 41% of those surveyed who market abroad are optimistic about prospects for the world economy, 50% are uncertain and only 9% are pessimistic. A year ago, only 4% of the international segment was optimistic about the global economy, while 69% were pessimistic.

 

“We are beginning to see cautious optimism about the economy in the industrial manufacturing sector,” said Barry Misthal, U.S. industrial manufacturing leader for PricewaterhouseCoopers.  “There is a sense that the worst is over, but recovery will be slow.  These manufacturing executives are still facing a significant challenge to their growth targets from a lack of demand.  The industry needs improved momentum in the overall business climate and a reduction in regulatory and legislative pressures."

 

Concern about lack of demand remains the chief barrier to growth over the next 12 months for 75% of industrial manufacturers interviewed, however this represents a drop of 20 points from the high of 95% recorded in the first quarter of 2009.  Other areas of great concern include taxation policies at 53%, legislative/regulatory pressures at 52%, and decreasing profitability at 42%.  Anxiety about oil/energy prices rose 8 points to 33% but remained well below the 2008 highs, while concerns over capital constraints remained low at 22%.

 

Thirty percent of those surveyed plan to add employees to their workforce over the next 12 months (up 5 points from last quarter), and only 12% plan to reduce the number of full-time equivalent employees (down 16 points from last quarter). Of the 30% of respondents planning to hire within the next 12 months, the most sought-after employees will be professionals/technicians (23%). Only 8% of those surveyed report that their companies have begun to rehire workers who were laid off during the economic downturn.

 

Inventory remained down for 49% of U.S.-based industrial manufacturers and up for only 12%, for a net minus 37%. This indicates that the anticipated inventory buildup has not begun as of Q4 2009.

 

While many U.S.-based industrial manufacturers are planning new capital investments, the report’s findings indicate a moderate investment rate. Looking at the next 12 months, 35% plan major new investments of capital, compared with 37% last quarter and 33% last year.

 

In the next 12 months, 65% of industrial manufacturers plan to increase operational spending, similar to last quarter’s 68%. Among increased expenditures, new product or service introductions and research and development lead the way (37% each). Geographic expansion rose five points to 27% but business acquisitions dropped 10 points this quarter to 23%.

 

In the fourth quarter of 2009, 28% of panelists reported higher gross margins while 22% reported lower gross margins – a net of plus 6% with higher margins but below the prior quarter’s plus 15%. Twenty percent of U.S.-based industrial manufacturers reported higher costs during the fourth quarter while 22% reported lower costs – for a net minus 2%. On the pricing side, In Q4, 23% of respondents reported raising prices (up 6 points from the prior quarter) and only 15% lowered them (down 12 points from prior quarter).

 

With signs of recovery on the horizon, this quarter the Manufacturing Barometer probed executives regarding their focus on rehiring and restarting projects that were stopped due to the recession.

 

The projects that were put on hold during the recession that will most likely get the go ahead are in the areas of information technology (42%); new product/service introduction (38%); and geographic expansion (35%).

 

In terms of rehiring, 60% of those surveyed have no immediate plans to rehire workers laid off during the economic downturn. Eight percent have started the process of rehiring, while 24% have plans to do so in the near-term.

 

Overall, signs of recovery in terms of project restarts and rehiring are beginning to appear, but companies will proceed cautiously and conservatively in 2010, with an eye to the future.

 

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 Q4 2009 and was conducted from Oct. 13, 2009 through Jan.  12, 2010.