U.S. Industrial Manufacturers Still Cautiously Optimistic

One-third believed the U.S. economy was growing in Q1 2010, and 12% believed it was declining but the majority believed that the U.S. economy was unchanged

The latest edition of the PricewaterhouseCoopers LLP Manufacturing Barometer reports that over half of industrial products manufacturers (53%) are optimistic about the U.S. economys prospects over the next 12 months. Only 10% are pessimistic, a sharp contrast to 55% a year ago; while 37% remain uncertain.

Similarly, the majority of panelists who market abroad are optimistic about prospects for the world economy over the next 12 months, up 12 points from last quarter to 53%. Only 5% are pessimistic and 42% are uncertain.

One-third of panelists believed the U.S. economy was growing in Q1 2010, and 12% believed it was declining. The majority (55%) believed that the U.S. economy was unchanged, similar to the prior quarter. International panelists expressed an even higher level of optimism regarding the world economy in Q1 2010, with 44% viewing the world economy as growing and 16 percent believing it was declining. Additionally, 40% felt the world economy was unchanged.

For U.S.-based industrial manufacturers that sell abroad, international markets showed further improvement in the first quarter of 2010. Forty-nine percent of respondents reported an increase in sales, up from 38% last quarter. The number of manufacturers reporting a decrease dropped to 24%, down significantly from one year ago, when 60% reported a decrease, and 27% were about the same this quarter. Additionally, of respondents selling abroad, the projected contribution of international sales to total revenue is 40% over the next 12 months, notably above the prior quarter's 34% and last year's 36%.

Looking at the next 12 months, 75% of panelists expect positive revenue growth for their companies, up 18 points from the prior quarter. Of that group, 63% expect single-digit growth, and 12% anticipate double-digit growth. Only 15% forecast negative growth, and 7% forecast zero growth.

Legislative/regulatory pressures unseated lack of demand as the most cited issue that could slow growth over the next 12 months, with 73% of panelists naming it as a concern (up 21 points from last quarter.) The number concerned about lack of demand is down but remains a chief barrier, cited by 63% of respondents. Other barriers cited this quarter include decreasing profitability, the monetary exchange rate and capital constraints.

Twenty-seven percent of those surveyed plan to add employees to their workforces over the next 12 months, and 17% plan to reduce the number of full-time equivalent employees, which is similar to the prior quarter. The net workforce projection is plus 0.5%, similar to last quarter's plus 0.4%.

Inventory remained down for 41% of U.S.-based industrial manufacturers and up for 23%, for a net minus of 18%. This compares to a net minus of 37% in the previous quarter and indicates that some activity in inventory replenishment has begun as of Q1 2010.

Twenty-eight percent plan major new investments of capital during the next 12 months, compared with 35% last quarter. Although the number is down, the mean investment as a percentage of total sales is notably higher -- 8.4% this quarter compared with 4.6% the fourth quarter of 2009.

Looking at the next 12 months, 70% plan to increase operational spending, up five points from last quarters 65%. Among increased expenditures, new product or service introductions lead the way, cited by 43%, with research and development remaining in second place at 28%.

In the first quarter of 2010, gross margins were relatively flat: higher for 33%t of panelists and lower for 35 percent, for a net minus of 2%, below the prior quarter's plus 6%. Costs were slightly up: higher for 20% of U.S.-based industrial manufacturers and lower for 15% -- for a net plus 5%. On the pricing side, prices showed pressure this quarter -- only 13% raised prices, and 28% lowered them, for a net minus 15%, notably below the prior quarter.

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