NEW YORK - Optimism regarding the direction of the domestic economy softened in the second quarter of 2015 compared to the previous nine-year high recorded in the first quarter among U.S. industrial manufacturers, according to the Q2 2015 Manufacturing Barometer, released by PwC US.

Respondents also trimmed overall growth forecasts and spending plans, reflecting caution around the strengthening of the U.S. dollar and potential rise in domestic interest rates, as well as continued uncertainty regarding the direction of global economy.

Optimism regarding the prospects of the U.S. economy during the next 12 months decreased to a still healthy 69 percent among manufacturers in the second quarter of 2015, compared to 76 percent in the first quarter, but up from 65 percent in the second quarter of 2014. Optimism about the world economy declined to 38 percent, compared to 42 percent in the previous quarter. Reflecting the reduced sentiment, projected company revenue growth for the next 12 months slowed to 4.9 percent in the second quarter, compared to 5.1 percent in the previous quarter.

“As a result of several macro-economic factors taking shape, U.S. industrial manufacturers seem to be taking a more measured view of business conditions in the year ahead,” said Bobby Bono, U.S. industrial manufacturing leader, PwC. “Slower GDP growth, the impact of the strong dollar, issues in China and uncertainty in Europe are among the developments that are likely causing industrial manufacturers to reassess the broader economic picture, as well as spending plans across a range of categories. Still, the overall outlook for U.S. industrial manufacturers appears to be positive, marked by relatively high levels of optimism regarding both the domestic economy and company revenue growth forecasts.”

Operational Spending

Reflecting the more cautious outlook, operational spending plans dropped to 75 percent, down from a two year high of 83 percent in the first quarter. Looking at sequential changes among the top spending categories, plans for new products or service introductions dropped to 44 percent from 55 percent, while research and development decreased to 34 percent from 40 percent and information technology decreased to 22 percent from 33 percent during the first quarter. “While these spending decreases are notable, we believe they reflect more of a pause in sentiment, as management teams evaluate strategies to adjust to evolving market conditions, including the possibility of Federal Reserve action later this year” Bono added.

Capital Spending

According to the survey, sentiment regarding capital spending also trailed off with only 34 percent of respondents indicating plans for major new investments of capital in the year ahead, down from 52 percent in the first quarter. Following the recent trend, plans for M&A moderated during the second quarter as well, with 29 percent of respondents indicating an interest, compared to 43 percent in the first quarter and 38 percent in the second quarter of last year.

Headwinds to Growth

Looking at perceived headwinds, survey respondents identified lack of demand, legislative/regulatory pressures and monetary exchange rate as the top perceived barriers to growth in the year ahead. Concern about monetary exchange rate showed the biggest gain, rising to 37 percent of respondents, up from 21 percent in the first quarter. In addition, lack of demand rose to 39 percent, up ten points sequentially, while legislative/regulatory pressure jumped to 39 percent as well, up from 33 percent in the first quarter.

Of interest, the perceived barrier of lack of qualified workers dropped to 24 percent in the second quarter from 35 percent in the first quarter, representing the lowest level in six quarters. The reduced anxiety regarding identifying qualified workers dovetailed with a flat (52 percent) indication sequentially regarding plans to hire more workers in the year ahead. “It’s too early to tell,” Bono added. “But, the softer outlook might be reducing some of the near-term pressure on management teams to add more workers, though the shortage in skilled workers, or the talent gap, remains a long-term challenge across the sector.”

Global Expansion

With regard to global expansion, only 12 percent of manufacturers plan to expand to new markets abroad, and nine percent plan for new facilities abroad, both continuing a trend of reduced overseas expansion seen in recent quarters. Along similar lines, among respondents with international operations, the projected contribution from international sales to total revenue over the next 12 months remained in line with the first quarter at 27 percent, the lowest level since the fourth quarter of 2006.

Impact of Strong Dollar

PwC’s survey also included a section on the stronger U.S. dollar, which found that 82 percent of respondents expect an impact on revenues, average 3.5 percent, in the year ahead. In view of the stronger dollar, panelists believe reform of U.S. corporate taxes might be helpful (53 percent very/extremely helpful) to their own companies’ bottom line over the next 12-18 months. Three other U.S. government actions were also cited as potentially helpful: more sensible U.S. regulations, including financial regulations (49 percent); repatriation of U.S. companies’ international profits at low tax rates, less than 10 percent (39 percent); and international trade treaties with Asia: China, India, Japan (33 percent). In addition, a majority of panelists believe the stronger dollar may lead to new or strengthened strategic alliances (47 percent) or new or strengthened joint ventures (31 percent) over the next 12-18 months.

To view the complete Manufacturing Barometer report, visit www.pwc.com/manufacturing-barometer.