Manufacturers are Cautiously Optimistic About 2010

However lack of demand remains the chief barrier to growth

Nearly half (47%) of survey respondents to the PricewaterhouseCoopers LLP Manufacturing Barometer are are optimistic about the U.S. economy's prospects, whereas only 5% were optimistic a year ago.

Similarly, 41% of panelists who sell internationally are optimistic about the prospects for the world economy, compared to only 4% a year ago. Thirty-eight percent of industrial manufacturers that sell abroad reported an increase in international sales, up 16 points over last quarter. The number reporting a decrease in international sales fell to 22% from 39% in the prior quarter and is down significantly from the 60% reported in the first quarter of 2009.

Industrial manufacturers' average revenue growth for calendar year 2009 ended with a double-digit loss (minus 11%), with only 20% reporting positive growth. However, in sharp contrast, the majority (57%) forecast positive revenue growth for their own companies in 2010 with 19% forecasting double-digit growth, and 38% forecasting single-digit growth. Only 13% forecast negative growth.

Looking ahead, 47% of respondents are optimistic about the 12-month outlook for the U.S. economy, similar to the prior quarter. Only 10% remain pessimistic, and 43% are uncertain. This level of cautious optimism is in sharp contrast to a year ago, when 70% were pessimistic. Similarly, 41% of those surveyed who market abroad are optimistic about prospects for the world economy, 50% are uncertain and only 9% are pessimistic. A year ago, only 4% of the international segment was optimistic about the global economy, while 69% were pessimistic.

"We are beginning to see cautious optimism about the economy in the industrial manufacturing sector," said Barry Misthal, U.S. industrial manufacturing leader for PricewaterhouseCoopers. "There is a sense that the worst is over, but recovery will be slow. These manufacturing executives are still facing a significant challenge to their growth targets from a lack of demand. The industry needs improved momentum in the overall business climate and a reduction in regulatory and legislative pressures."

Concern about lack of demand remains the chief barrier to growth over the next 12 months for 75% of industrial manufacturers interviewed, however this represents a drop of 20 points from the high of 95% recorded in the first quarter of 2009.

Other areas of great concern include taxation policies at 53%, legislative/regulatory pressures at 52%, and decreasing profitability at 42%. Anxiety about oil/energy prices rose 8 points to 33% but remained well below the 2008 highs, while concerns over capital constraints remained low at 22%.

Thirty percent of those surveyed plan to add employees to their workforce over the next 12 months (up 5 points from last quarter), and only 12% plan to reduce the number of full-time equivalent employees (down 16 points from last quarter). Of the 30% of respondents planning to hire within the next 12 months, the most sought-after employees will be professionals/technicians (23%.) Only 8% of those surveyed report that their companies have begun to rehire workers who were laid off during the economic downturn.

Inventory remained down for 49% of U.S.-based industrial manufacturers and up for only 12%, for a net minus 37%. This indicates that the anticipated inventory buildup has not begun as of Q4 2009.

While many U.S.-based industrial manufacturers are planning new capital investments, the report' findings indicate a moderate investment rate. Looking at the next 12 months, 35% plan major new investments of capital, compared with 37% last quarter and 33% last year.

In the next 12 months, 65% of industrial manufacturers plan to increase operational spending, similar to last quarter's 68%. Among increased expenditures, new product or service introductions and research and development lead the way (37% each.) Geographic expansion rose five points to 27% but business acquisitions dropped 10 points this quarter to 23%.

In the fourth quarter of 2009, 28% of panelists reported higher gross margins while 22% reported lower gross margins - a net of plus 6 percent with higher margins but below the prior quarter's plus 15%. Twenty percent of U.S.-based industrial manufacturers reported higher costs during the fourth quarter while 22% reported lower costs - for a net minus 2%. On the pricing side, in Q4, 23% of respondents reported raising prices (up 6 points from the prior quarter) and only 15 % lowered them (down 12 points from prior quarter.)

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