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Optimism Over U.S. Manufacturing Rises

NEW YORK - Optimism regarding the direction of the domestic economy rose among U.S. industrial manufacturers during the first quarter of 2014, according to the Q1 2014 Manufacturing Barometer, released by PwC US.  The positive sentiment about the prospects of U.S. commerce in the next 12 months reached the highest level since the fourth quarter of 2005.  Conversely, optimism regarding the prospects of the world economy lessened during the first quarter as U.S. industrial manufacturers remained cautious on the global stage. 

Optimism around the prospects of the U.S. economy during the next 12 months rose among U.S. industrial manufacturers to 71% in the first quarter of 2014, from 68% in the previous quarter and 55% in the first quarter of 2013.  Concurrent with the improved sentiment, uncertainty around the domestic outlook has continued to abate among industrial manufacturers, dropping to 27% in the first quarter, representing the lowest level since the first quarter of 2012.

“The level of optimism among industrial manufacturers concerning the direction of the domestic economy continued to rise, with company revenue growth expectations remaining at healthy levels,” said Bobby Bono, PwC’s U.S. industrial manufacturing leader.  “This improved sentiment bodes well for the year ahead, as management teams continue to indicate consistent near-term spending plans, including hiring more workers, supporting new product development and investing in IT and R&D.  At the same time, sentiment regarding the outlook for worldwide commerce softened in the early months of 2014, while the level of uncertainty remained elevated.  As a result, companies are continuing to focus primarily on investing in core products and services in an effort to expand market share, while taking a cautious approach to longer-term capital investment and overseas expansion.”

According to the latest Manufacturing Barometer, overall sentiment about the world’s economic prospects among U.S. industrial manufacturers that market abroad weakened somewhat during the first quarter of 2014, with optimism declining to 41% from 47% in the fourth quarter of 2013.  However, global sentiment is ahead of the 36% level of optimism recorded in the first quarter of 2013.

Regarding actual company growth expectations, 82% of survey respondents expect positive revenue growth for their own companies in the next 12 months, with 15% forecasting double-digit gains and only five% anticipating decreased revenues.  The projected average revenue growth rate for own-company revenue over the next 12 months remained consistent at 5.3%, compared to 5.4% in the fourth quarter of 2013, but well above the 4.3% recorded in the first quarter of 2013.

The majority (56%) of U.S. industrial manufacturers surveyed plan to add employees to their workforce over the next 12 months.  This level is down modestly from the 60% indicating hiring plans in the fourth quarter of 2013, but up from 45% in last year’s first quarter. According to PwC’s report, the most sought-after employees will be skilled labor (33%), followed by production workers (30%) and professionals/technicians (28%).  In addition, there was an increase in plans to hire white collar support personnel at 20%, compared to only seven% in last year’s first quarter.

“While industrial manufacturers have continued to indicate a focus on hiring skilled labor, they are also increasingly concerned about the lack of qualified workers,” added Bono.  “As the economy continues its growth path and the unemployment rate decreases, we will likely see an increased need for worker training programs aimed at helping companies support expansion, lift production and support innovation.”

Plans for operational spending remain consistent, with 75% of respondents indicating increased outlays in the next 12 months, up slightly from 73% in the fourth quarter and 71% in the first quarter of 2013. Over the next 12 months, the leading investment areas include new product or service introductions, information technology and research and development.  While near-term operating spending plans remain healthy, indications for longer-term investment remain moderate. 

Twenty-eight% of respondents planned M&A activity in the year ahead, with the majority of that group focusing on purchasing another business, followed by the sale of part/all of their own business or a spin-off.   “Supported by strong balance sheets, there has been a gradual increase in sentiment for M&A among industrial manufacturers, pointing to some potential for increased activity in the year ahead,” Bono stated.  Looking at other business initiatives, 18% of respondents indicated plans to expand into new markets abroad, while 13% planned to invest in new facilities abroad.

Among the survey findings, lack of demand was cited as the leading potential barrier to growth in the next 12 months for 44% of respondents.  This was followed by concerns about legislation/regulatory pressures, as indicated by 38% of respondents.  Concern about capital constraints was mentioned by 28% of respondents, up notably from 17% in the fourth quarter.   In addition, concerns about lack of qualified workers and potential decreasing profitability both rose to 28% of respondents, from 20% in the fourth quarter. 

Special Topic: Impact of Lower Energy Costs

The latest Manufacturing Barometer revealed that 42% of industrial manufacturers anticipate lower overall energy costs over the next two to three years.   Among other findings, the Barometer revealed that while 62% believe lower energy prices will have a positive impact on the U.S. economy, only 39% believe it will have a positive impact on the U.S. job market and new hiring.  Fewer, 33%, believe it will bolster their own companies’ revenues.  

A majority (75%) of respondents noted that the most probable use of an “energy premium” by their own company would be to create higher bottom-line profits.  A net 53% indicated they will likely seek to expand their own businesses in new markets abroad (41%), existing markets (37%), and/or new markets in the U.S. (30%). This was followed by improvement of supply chain (49%), while development/upgrade of manufacturing systems was cited by 39% of respondents.  However, only 32% believe an energy premium would lead to an increased workforce/additional new hiring, and only 18% would likely increase capital spending.

“Only 18% of industrial manufacturers confirmed that the benefits of reduced energy costs would likely lead to increased capital spending, in line with the conservative stance to long-term capital outlays we are seeing across the industry,” noted Bono.  “While U.S. industrial manufacturers are investing in operational improvements and product development, they also remain focused on guarding against risk, maintaining strong balance sheets and supporting profit margins.”

For more, visit www.pwc.com/manufacturing-barometer

Source: Quality

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