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Industrial Manufacturers Report Renewed Economic Optimism

April 18, 2006
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NEW YORK-Large, U.S.-based industrial manufacturers report renewed optimism about the U.S. and world economies over the next 12 months, despite continued concern about high energy prices, according to Pricewater-houseCoopers' Manufacturing Barometer. In the year ahead, these companies expect solid revenue growth, a higher level of new investments, as well as an upturn in hiring and M&A activity.

More than three-quarters of executives interviewed (76%) are optimistic about the domestic economy's prospects over the next 12 months, up from a low of 45% in Q3 2005 and 54% the quarter before. Twenty-two percent are uncertain about the economy, and only 2% are pessimistic.

Additionally, 71% are optimistic about the world economy, up from 54% in Q3 2005 and 66% a year ago.

The Barometer shows that industrial manufacturers have recast their growth forecasts. They expect revenue gains averaging 7.7% over the next 12 months-consistent with the 7.8% estimated in the prior quarter and a year ago.

The survey also shows that while energy costs continue to be a concern for the sector, they are not as significant as they were last quarter. In fact, 65% of those surveyed in Q4 2005 consider escalating energy prices a potential roadblock to their company's growth over the next 12 months-still significant, but down from 80% in the prior quarter.

"These findings suggest that industrial manufacturers are returning to a more-positive business outlook following a debilitating prior quarter that saw two hurricane disasters, business interruptions, and continuation of shockingly high energy prices," says Jorge Milo, leader of PricewaterhouseCoopers' U.S. industrial manufacturing practice. "Today these leaders are holding steady to their growth targets and taking a brighter view of business conditions at home and abroad."

Fifty-seven percent of surveyed executives plan to make major new investments of capital over the next 12 months-down from 60% in Q3 2005-but exceeding the 45% of a year ago. The level of new investment is expected to be higher, averaging 9.8% of revenue, well ahead of the prior quarter's estimate of 8%, and 7.9% a year ago. Over the next 12 months, increased investments are expected in six areas, led by business acquisitions.

In a special section of this quarter's Barometer, more than half (55%) of the respondents reported involvement in M&A activities, alliances, and joint ventures during 2005-including 34% participating in acquisitions and 24% in divestitures. Over the next 12 months, 48% expect to make increased M&A-related investments, with 32% planning greater activity in acquisitions and 10% planning greater M&A activity in Asia.

Sixty-one percent of those surveyed plan to increase their workforce over the next 12 months-up from 52% in Q3 2005 and 53% a year ago. As a group, industrial manufacturers now expect the size of their workforce to increase by an average of +2%, up strongly from negative growth of -0.5% projected in the prior quarter.

"Industrial manufacturers expect to maintain a steady, profitable growth pace, with a higher level of major new investments," says Milo. "And, after years of caution, they now appear ready to add workers for the growth they envision."

Higher costs and pass-through price increases have provided an opportunity for industrial manufacturers to test their pricing power and improve their gross margins. In the fourth quarter, costs were higher for 61% of those surveyed, and lower for only 7%. Over half (55%) increased their prices, while only 3% lowered them. In the process, 37% increased their gross margins, while 19% had a decrease-for a net of 18% showing improvement. This compares favorably with a net of 12% showing improvement in the prior quarter.

Another positive indicator: Overall, only 26% cite decreasing profitability as a potential barrier to their company's growth over the next 12 months, down from 30% a year ago.

"When faced with escalating costs, these companies expect to do better than just hold their own," says Milo. "In an improving environment, they are expecting solid revenue growth, and their margins are getting stronger."

PricewaterhouseCoopers' "Manufacturing Barometer" is developed and compiled with assistance from the opinion and economic research firm of BSI Global Research Inc.

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