The latest edition of the PricewaterhouseCoopers LLP Manufacturing Barometer, released on April 27, reports that cautious optimism continues to grow in regard to the U.S. and global economies among U.S.-based industrial manufacturers, according to the first-quarter 2010 report. Over half of industrial products manufacturers (53 percent) are optimistic about the U.S. economy's prospects over the next 12 months. Only 10 percent are pessimistic, a sharp contrast to 55 percent a year ago; while 37 percent remain uncertain.
Similarly, the majority of panelists who market abroad are optimistic about prospects for the world economy over the next 12 months, up 12 points from last quarter to 53 percent. Only 5 percent are pessimistic and 42 percent are uncertain.
One-third of panelists believed the U.S. economy was growing in Q1 2010, and 12 percent believed it was declining. The majority (55 percent) believed that the U.S. economy was unchanged, similar to the prior quarter. International panelists expressed an even higher level of optimism regarding the world economy in Q1 2010, with 44 percent viewing the world economy as growing and 16 percent believing it was declining. Additionally, 40 percent felt the world economy was unchanged.
For U.S.-based industrial manufacturers that sell abroad, international markets showed further improvement in the first quarter of 2010. Forty-nine percent of respondents reported an increase in sales, up from 38 percent last quarter. The number of manufacturers reporting a decrease dropped to 24 percent, down significantly from one year ago, when 60 percent reported a decrease, and 27 percent were about the same this quarter. Additionally, of respondents selling abroad, the projected contribution of international sales to total revenue is 40 percent over the next 12 months, notably above the prior quarter's 34 percent and last year's 36 percent.
Looking at the next 12 months, 75 percent of panelists expect positive revenue growth for their companies, up 18 points from the prior quarter. Of that group, 63 percent expect single-digit growth, and 12 percent anticipate double-digit growth. Only 15 percent forecast negative growth, and 7 percent forecast zero growth.
"While confidence among industrial manufacturers remains somewhat guarded, economic indicators confirm the outlook for the industry is gradually growing more positive," said Barry Misthal, U.S. industrial manufacturing leader for PricewaterhouseCoopers. "Many companies are projecting positive growth throughout the year, however, increased concerns over legislative and regulatory pressures may inhibit the rate of growth in the short term."
Legislative/regulatory pressures unseated lack of demand as the most cited issue that could slow growth over the next 12 months, with 73 percent of panelists naming it as a concern (up 21 points from last quarter). The number concerned about lack of demand is down but remains a chief barrier, cited by 63 percent of respondents. Other barriers cited this quarter include decreasing profitability, the monetary exchange rate, and capital constraints.
Twenty-seven percent of those surveyed plan to add employees to their workforces over the next 12 months, and 17 percent plan to reduce the number of full-time equivalent employees, which is similar to the prior quarter. The net workforce projection is plus 0.5 percent, similar to last quarter's plus 0.4 percent.
Inventory remained down for 41 percent of U.S.-based industrial manufacturers and up for 23 percent, for a net minus of 18 percent. This compares to a net minus of 37 percent in the previous quarter and indicates that some activity in inventory replenishment has begun as of Q1 2010.
Twenty-eight percent plan major new investments of capital during the next 12 months, compared with 35 percent last quarter. Although the number is down, the mean investment as a percentage of total sales is notably higher – 8.4 percent this quarter compared with 4.6 percent the fourth quarter of 2009.
Looking at the next 12 months, 70 percent plan to increase operational spending, up five points from last quarter's 65 percent. Among increased expenditures, new product or service introductions lead the way, cited by 43 percent, with research and development remaining in second place at 28 percent.
Planned M&A activity also rose, up nine points to 37 percent, with a focus on purchase of another business. Expansion to new markets abroad was also on the rise, up 8 points to 28 percent. New strategic alliances and new joint ventures remained high at 33 percent and 27 percent, respectively.
In the first quarter of 2010, gross margins were relatively flat: higher for 33 percent of panelists and lower for 35 percent, for a net minus of 2 percent, below the prior quarter's plus 6 percent. Costs were slightly up: higher for 20 percent of U.S.-based industrial manufacturers and lower for 15 percent – for a net plus 5 percent. On the pricing side, prices showed pressure this quarter – only 13 percent raised prices, and 28 percent lowered them, for a net minus 15 percent, notably below the prior quarter.
Greenhouse Gas Emissions
With ever-increasing environmental awareness and amid the ongoing debate over greenhouse gases, this quarter the Manufacturing Barometer incorporated questions to learn how potential climate change regulation and the impetus to reduce carbon emissions are affecting panelists.
Of survey respondents, 88 percent indicated they were aware of the new EPA endangerment finding that greenhouse gases threaten public health and may be regulated under the Clean Air Act. More than half said greenhouse gas regulations would impact their business, with 32 percent saying it would have a great impact and 27 percent anticipating a moderate impact. Twenty-eight percent expected little or no impact on their business, and 13 percent were uncertain.
More than half (54 percent) of respondents have either publicly stated their goals to reduce emissions (42 percent) or have said they plan to do so within the next two years (12 percent). However, one-third have no current plans to publicly state their reduction goals.
"It's a positive sign that more than half of the companies participating in our survey have plans to reduce their emissions," added Misthal. "The challenge lies in being able to measure their emissions reliably, and those that have a head-start on this will gain a great advantage over those who have yet to begin."
Only 25 percent of panelists are very confident that their companies' greenhouse gas emissions are being measured reliably. More are somewhat confident (37 percent) and 10 percent are not confident at all. A fairly large number (16 percent) were not certain about data reliability. Twelve percent do not measure emissions data.
