NEW YORK CITY-The latest edition of the PwC US Manufacturing Barometer reports that despite the ongoing uncertainty about the United States and world economies’ prospects over the next 12 months, a vast majority of U.S. industrial manufacturers expect positive revenue growth for 2011. However, concerns over high oil and energy costs top the list of potential barriers to growth this year, while higher overall costs are driving industrial manufacturers to proactively respond to pricing challenges, according to PwC’s Q1 2011 report.

“Despite lingering uncertainty over macroeconomic conditions, PwC’s latest survey found that U.S. industrial manufacturers are increasingly positive about the future prospects of growth within their own businesses, as well as for the general industry,” says Barry Misthal,, U.S. industrial manufacturing leader for PwC. “The improving outlook can be attributed to industrial manufacturers feeling confident in their planning for 2011 and the ongoing investments they are making to further enhance their revenue opportunities.”

The projected average growth rate for own-company revenue over the next 12 months rose to 7 % in the first quarter of 2011 from 6.6 % in the fourth quarter of 2010. The Q1 2011 rate more than doubles the 3 % projected average growth rate reported in the first quarter of 2010. Eighty-nine percent expect positive revenue growth for their own companies in the year ahead, an increase of 14 points over first quarter 2010 and 5 points over the fourth quarter. Thirty-three percent are forecasting double-digit growth, a significant increase of 21 points over first quarter 2010, while 56 % are forecasting single digit growth. Only 5 % forecast negative growth and another 2 % are forecasting zero growth.

Looking at the next 12 months, 57 % of industrial manufacturers expressed optimism about the U.S. economy, down 6 points from the fourth quarter of 2010, but 4 points higher than the same period in 2010. Uncertainty about the U.S. economy was cited by 38 % of panelists, an increase of 8 points, while only 5 % remain pessimistic versus 7 % last quarter. Forty-four percent of panelists were optimistic about projections for the 12 month outlook for the world economy, a decline of 16 points from the fourth quarter 2010. The majority (51%) are uncertain, up 13 points, while only 5 % are pessimistic about the global economic outlook.

In the first quarter of 2011, 65 % of respondents believed the U.S. economy was growing, up 4 points from the final quarter of 2010. For the first time in five years, no panelist believed it was declining. Thirty-five percent believed the U.S. economy did not change from last quarter. Gross margins for the first three months also remained positive. They were higher for 37 % of panelists and lower for 29%, for a net plus 8% , which is below the fourth quarter's plus 15%.

A surge in oil and energy prices contributed to 65 percent of respondents citing oil and energy prices as the greatest potential barrier to own-company revenue growth over the next 12 months, rising 38 points from the fourth quarter as the cost per barrel of oil surged above $100. In 2008, when the cost of oil reached $145 per barrel, a survey high of 78 % of panelists rated oil and energy prices as the leading barrier. The increased price of oil and energy surpassed legislation and regulatory pressures (54%), which had topped the list of barriers for the past year. Concerns about demand plummeted 22 points to 41 % and concern about a lack of qualified workers rose for a second quarter, up 12 points to 25%.

In the first three months of 2011, a majority (51 %) of U.S.-based industrial manufacturers reported higher costs, and 8 % reported lower costs for a net plus 43%. Forty-three percent raised prices, and only 11 % lowered them, for a net of plus 32%.

“Although U.S. industrial manufacturers are increasing their own company revenue forecasts as a result of increased demand, they face headwinds from increasing commodity costs. They will need to continue to find ways to improve operational effectiveness and cost management to profit from the current economic climate,” continues PwC’s Misthal. “Even with oil and gas prices and costs increasing, every panelist expected the U.S. economy to grow or stay the same in the first quarter.”

U.S.-based industrial manufacturers that sell abroad continued to grow revenue in the first quarter of 2011, with 59 % reporting an uptick in sales, while 39 % responded that sales remained the same over the prior quarter. Only 2% reported a decrease. The projected contribution of international sales to total revenue, however, declined to 34% from the prior quarter’s 38%, possibly a reflection of growth in domestic revenue.

Over the next 12 months, nearly half of the panelists (49%) are planning major new investments of capital, an increase of five points over last quarter and 21 points higher than last year. The increase marks the fifth straight quarterly increase in spending projections. Operational spending is also expected to increase, with 86 % planning an increase, up from 82 % in the fourth quarter and 70 % in the first quarter of 2010. Operational spending plans are led by new product or service introductions (49%), research and development (46%), business acquisitions (41%), and information technology (41%).

Fifty-one percent of respondents plan to add employees to their workforce over the next 12 months, up three points from the fourth quarter and 24 points higher than the first quarter of 2010. Only 3 % plan a net reduction, compared to 17 % last year, while 46 % will stay about the same. The net workforce composite projection is plus 1.3%, well-above the 0.5 % from the first quarter of 2010.

“The fact that U.S. industrial manufacturers are continuing to increase spending shows they are confident in their future and are making investments in their businesses, operations and people to drive future growth,” adds Misthal.

Adopting and Responding to the Current Climate

The most prominent planning issue among the panelists was the higher costs of goods and services, cited by 92%. This was also cited the most often among the top three challenges to own company growth. In terms of planning for the year ahead, 75 % t are contemplating how they will respond to increased price flexibility, 70 % will place a greater focus on retaining and developing talent, and 70 % anticipate opportunities for prudent risk taking.

Economic conditions or own-company performance indicators prompted 85 % of respondents to make significant changes in 2011 plans. These changes include increasing prices and stepping up R&D activity, new product introductions, hiring and production. Yet, only 12 % expect a major transformation or restructuring of their business within the next three years.

Currently, 40 percent of respondents are maintaining a larger cash position than they typically do – 17 % “significantly higher” and 23 % a “little larger.” Over the next 12-18 months, 83 % of those holding more cash foresee using it for acquisitions, joint ventures, increased hiring, R&D, facilities expansion and IT projects. Seventeen % plan to hold on to their cash.

Over the next year, many tax regulations and/or new tax proposals will be important to industrial manufacturers' profit growth. These are led by domestic manufacturing credits (70%), followed by bonus and/or accelerated depreciation, extended R&D credits, foreign-source income deferrals and limitations on foreign tax credits. Significantly, 57 % believe that one or more of these tax deductions will likely affect own-company hiring decisions over the next 12 months. The most influential deduction was domestic manufacturing credits, acknowledged by 33%.

“Industrial manufacturers have made adjustments to their 2011 plans and are putting their excess cash to work in areas of their businesses and operations that will yield long-term results,” continues Misthal. “While there is a significant threat being poised by cost increases, industrial manufacturers are not sitting on their hands but thinking through the various options to counteract those higher costs."

PwC's Manufacturing Barometer is a quarterly survey based on interviews with 63 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 throughout the next 12 months. This survey summarizes the results for Q1 2011 and was conducted from January 6 through April 4, 2011.