Pessimism is a Growth Commodity for Manufacturers

Pessimism is a Growth Commodity for Manufacturers

The window of opportunity for manufacturers could be closing more rapidly than most companies expect.

Assuming you could find a manufacturing CFO in a good enough mood to want to talk to you, you’d no doubt find that most of the optimism they had as recently as this past spring has largely vanished. “Renewed and rising economic and political concerns are turning companies away from aggressive growth and toward a more inward and defensive stance,” says Greg Dickinson, director of consulting firm Deloitte’s North American CFO survey.

The quarterly survey, which polled CFOs at North American companies averaging more than $5 billion in annual revenue, indicates that only 39% of CFOs are more optimistic about their companies’ economic prospects, compared to 63% in the previous survey. Those who say they are more pessimistic this quarter climbed to 29%, versus 15% in the previous quarter.

“Unrelenting high unemployment is driving rising concerns about consumer demand at home,” Dickinson says, “and that appears to be shifting CFOs’ attention inward toward things over which they have direct control, such as competitive tactics, process efficiency and working capital levels.”

"Rising concerns about consumer demand is shifting CFO's attention inward toward competitive tactics, process efficiency and working capital levels."

-Deloitte's Greg Dickinson

Problems that beset the economy earlier in the year have not abated, and now, there are some new ones to worry about, such as the farm sector and the Euro crisis,” adds Chris Kuehl, economist with the National Association of Credit Management (NACM).

The Credit Managers’ Index, NACM’s monthly calculation of the state of the economy, dropped to 53.4 in July, the lowest score since August 2011 (a score of 50 is the dividing point between expansion and contraction). Equally troubling is that the index of unfavorable factors (e.g., rejections of credit applications, accounts placed for collection, filings for bankruptcies) dropped to 49.8, the first time the unfavorable index has indicated contraction since the end of 2010, according to Kuehl. “This is a precipitous fall, and it is unlikely that a reversal will be swift. The slump is setting in more aggressively.”

As Kuehl sees it, a big area of concern is that these unfavorables could be foreshadowing that customers are experiencing recent cash-flow issues that were thought to have ended a couple years ago, when the recession purportedly ended. With consumer confidence still weak and the situation in Europe still cloudy, the prospects of business expansion within manufacturing are blocked somewhat by excess inventory levels. Manufacturers need to clear out existing inventory before launching into new production, which is further slowing growth opportunities.

There is some semblance of a bright side, though. “Nearly two-thirds of CFOs say their earnings growth can continue to outpace their sales growth for at least six more months,” Dickinson reports. The bad news, however, is that “only one-third thinks this can continue for more than a year.”

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