CHICAGO-As the economy struggles to gain momentum, 57% of manufacturing executives are cautiously optimistic about the outlook for the next six months and nearly two-thirds (70%) are planning to keep staff levels steady, according to a survey released by consulting firm Baker Tilly.

While many executives are guardedly positive, the level of optimism is shallow and there are deep pockets of pessimism, especially among small companies.

Executives are more pessimistic about the outlook for the manufacturing sector than the economy with slightly less than half (47%) expressing optimism. The key factor dampening the manufacturing outlook is the lack of customer demand, which was cited by nearly half of respondents (45%) as the greatest challenge to the expansion of their company.

The survey also measured the potential effect of a U.S. cap-and-trade program. Survey results indicate support among executives is surprisingly broad but not deep while opposition is sizeable and intense. If a cap-and-trade program increases energy costs, it could have a major effect on manufacturers with executives saying they would consider passing on costs to consumers, cutting back production, reducing employee benefits and laying off staff.

“The deep uncertainly about the economic outlook is reflected in the manufacturing sector, which is divided on prospects for the rest of 2009,” says Brad DeNoyer, partner and manufacturing industry lead at Baker Tilly. “Many manufacturers see reasons for cautious optimism but there is a pervasive ‘wait and see’ attitude regarding demand. The good news is manufacturers plan to delay more layoffs as long as possible, but they will need to find a way to aggressively cut costs if customer demand does not rebound soon.”

Economic Outlook

While nearly six in 10 manufacturing executives have a positive outlook for the U.S. economy for the next six months, the optimism is guarded and the pessimism is deep. A smaller percentage (9%) is very optimistic as compared with those (15%) who are very pessimistic.

Manufacturing executives are more pessimistic about their own sector than the overall economy. Again, the level of pessimism is deeply rooted. Only 3% are very optimistic about the sector outlook while 16% are very pessimistic.

Executives from small manufacturers are significantly more likely than medium- and large-firm executives to have a very pessimistic outlook on both the U.S. economy and the U.S. manufacturing sector. The major regional difference is that Midwest executives are more likely than Southern to have a very optimistic outlook.

About half of executives (49%) said they expect their firm’s performance to decline, with 12% of those executives saying their firm is in danger of failing. Executives from small firms (14%) were much more likely to report a danger of failing than those from medium (2%) or large firms (3%).

Executives generally plan to hold the line on staffing levels during the next six months. Seven in 10 executives expect their firm to have no net change in staff while 20% plan to have a net reduction and 9% plan a net increase.

During the next year, executives will consider a wide range of actions in response to the current economy:

Reduce operational costs (80% of executives)
Look for tax advantages (66%)
Increase diversity of products or customers (65%)
Seek price reductions from suppliers (65%)
Reduce labor costs (51%)
Reduce production (41%)
Reduce marketing and advertising (21%)
Seek a business partner or investors (18%)

"Manufacturers clearly prefer reducing operational costs rather than cutting benefits or laying off staff,” said DeNoyer. “And many firms are seeking to grow their business by expanding into new product niches and reaching new customers. But with profit margins so tight, it will be hard to avoid the more difficult choices if the economy continues to struggle for an extended period.”