“Overall sentiment regarding the direction of the domestic economy remained upbeat among U.S. industrial manufacturers in the first quarter,” said Bobby Bono, U.S. industrial manufacturing leader for PwC. “However, management teams are taking a more conservative approach to forecasting top line performance for the year ahead, given the moderate recovery underway and uncertainty pertaining to fiscal policy.”
Reflecting the sustained level of optimism, 78 percent of respondents forecast revenue growth at their own companies for the next 12 months, while only five percent expect negative results. The projected average revenue growth rate in the year ahead also dropped to 4.3 percent in the first quarter of 2013, from 5.2 percent in the fourth quarter of 2012. Still, attitudes pertaining to the outlook for the U.S. continue to contrast with sentiment regarding the international markets, where optimism toward the 12-month outlook was relatively low at 36 percent, with 45 percent expressing uncertainty. In addition, the projected contribution of international sales to total revenue over the next 12 months declined to 32 percent, as compared to 38 percent in the fourth quarter of 2012.
“Views pertaining to the world markets have remained muted, with close to half of survey respondents expressing uncertainty. As a result, we have witnessed a consistent pull back in overseas expansion plans during the past four quarters, with the first quarter of this year being at a low of 10 percent, the lowest it has ever been in almost a decade,” continued Bono. “Instead, management teams are planning to spend more on research and development, new product launches and information technology as they focus on building market share and boosting revenues in a competitive domestic market.”
With regard to investment spending, 43 percent of U.S. industrial manufacturers said they were planning major new investments of capital over the next 12 months, off four points from the fourth quarter of 2012 and below a year ago (53 percent). Plans for operational spending also slowed in the first quarter survey, with 71 percent of respondents planning increases over the next 12 months, a nine point reduction from the fourth quarter of 2012. Areas where operational spending is expected to increase included research and development, up 14 points to a high of 52 percent, followed by new product or service introductions (38 percent), and information technology (28 percent). Conversely, investment plans for geographic expansion hit a low of 10 percent, off 18 points from the fourth quarter of 2012.
Plans for M&A activity over the next 12 months dropped to 19 percent in the first quarter survey, off 16 points from the fourth quarter of 2012. In addition, plans for expansion to new markets abroad decreased 14 points to nine percent, indicating a significant slowdown in investments in international markets. “Overseas expansion plans have fallen off notably during the past four quarters, with the first quarter survey showing a 26-point reduction from last year,” said Bono. “It is clear that companies are keeping their cash closer to home and are waiting for clarity on the world stage before making decisions on investing internationally.”
According to the first quarter survey, new hiring plans over the next 12 months were reported by 45 percent of industrial manufacturers, off 13 points from 58 percent in the fourth quarter of 2012. Still, overall composite workforce projections rose from 0.5 percent in the fourth quarter to 1.0 percent in the first quarter, as a few industrial manufacturers are planning to add large numbers of new employees over the next 12 months.
In the first quarter of 2013, gross margins were higher for 29 percent and lower for 24 percent of survey respondents, off eight points from the fourth quarter of 2012. Costs were only moderately higher but prices rose more sharply. Looking ahead, 26 percent of survey respondents now view decreasing profitability as a barrier to growth over the next 12months (off four points).
With regard to headwinds to growth over the next 12 months, first quarter survey respondents highlighted legislative/regulatory pressures (55 percent, up eight points), lack of demand (48 percent, off four points) and taxation policies (45 percent, up 12 points). Taxation policies showed the greatest rise, up 25 points from a year ago (20 percent), reflecting the ongoing fiscal policy debates. In addition, legislative/regulatory pressures rose 15 points from a year ago (40 percent). “There’s no doubt that management teams are apprehensive about the direction of tax policy and it’s causing them to take a more measured approach to decision making and investment planning,” added Bono.