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US Industrial Manufacturers Less Pessimistic Over the US and Global Economies

Wednesday, August 26, 2009

43% of US Manufacturers Expect Positive Revenue Growth Over the Coming 12 Months

Pessimism is on the decline among U.S.-based industrial manufacturers over the U.S. and global economies, according to the PricewaterhouseCoopers LLP Manufacturing Barometer report

While a majority of survey respondents continued to view the US and global economies as declining in the second quarter of 2009, their overall outlook through the second quarter of 2010 shows improvement.

In the prior four quarters, an overwhelming majority of respondents viewed the US and world economies as declining. However, the outlook began to shift in Q2 with a 30 point drop to 63 percent of industrial manufacturing executives maintaining that the US economy is in decline. Similarly, 66 percent of respondents doing business abroad continued to view the world economy as declining in the second quarter, a marked improvement compared to the first quarter when nearly all (98 percent) viewed the world economy as declining.

While the majority of industrial manufacturers still believe the US and world economies declined in Q2 2009, the overall outlook for the next 12 months shows improvement -- with the lowest levels of pessimism and the highest levels of optimism seen in the past five quarters for both the US and world economies. Forty-three percent of respondents are optimistic about the US economy, up 27 points from Q1, and only 18 percent are pessimistic, down 37 points from the prior quarter. Among those respondents doing business abroad, 43 percent were optimistic about the world economy, up 31 points from last quarter, and only 18 percent were pessimistic, which was down significantly from the 58 percent reported in the first quarter.

“The decline in pessimism is promising since it shows increased economic confidence at both a US and global level,” said Barry Misthal, partner and industrial manufacturing sector leader at PricewaterhouseCoopers. “Many manufacturing executives still appear to be cautious in terms of identifying a turnaround for the economy, but many more are feeling optimistic than were last quarter. It’s still evident we have quite a ways to go, but we are certainly on the right trajectory.”

More industrial manufacturers are expecting positive growth than are expecting negative growth over the coming 12 months. In Q2, 43 percent of respondents are forecasting positive growth rates, up from 34 percent in the prior quarter. Nearly one-third (32 percent) are forecasting negative growth over the next year. Overall, the projected average revenue growth for industrial manufacturers over the next 12 months is minus 0.4 percent, well above the minus 7.9 percent for calendar year 2009, which is a signal of less pessimism that economic conditions may stabilize.

Although concern about market demand dropped in Q2 from the overwhelming survey high of 95 percent last quarter, it still remains the chief potential barrier to growth for US manufacturers over the next 12 months, according to 82 percent of survey respondents. Decreasing profitability is the second highest concern once again, cited by 50 percent of respondents (down 19 points from last quarter), followed by concern about new taxation policies (43 percent).

"Despite a slightly more optimistic view of the economy for the next 12 months, Industrial manufacturers are still very concerned about lack of future demand," explained Misthal. "And, return of that demand will be critical to the start of a turnaround for the industry."

International sales for U.S.-based industrial manufacturers selling abroad showed a slight upturn in Q2 after dropping consecutively for the past four quarters. Nearly one-fourth (24 percent) of respondents reported an increase in international sales in Q2, compared to 19 percent in the prior quarter. Additionally, companies reporting a decrease in international sales fell to 47 percent in Q2 from 60 percent in the first quarter. Despite this improvement in international sales, the projected contribution of international sales to total revenue over the next 12 months dropped from 36 percent in Q1 to 30 percent in Q2, which is the lowest projection reported in the previous four quarters.

Plans for major new investments of capital over the next 12 months rebounded slightly to 27 percent from last quarter’s survey low of 24 percent. Those respondents planning to make new investments also plan to spend more, with the mean investment rising to 6.2 percent of total sales, up from 5.4 percent last quarter.

Industrial manufacturers planning for M&A activity during the next 12 months grew to 28 percent in Q2 2009, up 13 points from last quarter. The increased interest in M&A activity was primarily driven by a desire to purchase another business (up 15 points to 25 percent this quarter). Plans to expand to new markets abroad are also increasing, rising to 27 percent from 18 percent last quarter. Forging new strategic alliances also remains of great interest, rising to 30 percent this quarter.

In the second quarter, the survey found that costs and prices continued to show a net decrease. However, reversing the trend seen in the past four quarters, more respondents this quarter cited increasing costs and prices, and fewer experienced decreasing costs. Only 17 percent of U.S.-based industrial manufacturers reported higher costs, while 42 percent reported lower costs. On the pricing side, only 18 percent raised prices, compared to the 30 percent that lowered them.

Click here to view the complete Manufacturing Barometer report.

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