When it comes to sales and investment, American manufacturers are taking Dorothy’s advice from The Wizard of Oz: “There’s no place like home.”
Only 23% of manufacturers are optimistic about the direction of the global economy, according to the Q3 2015 Manufacturing Barometer, a survey of senior executives at large U.S. industrial companies released by PwC US. That’s down from 38% three months ago. Some 23% said they are pessimistic about global prospects and 40% said they believe the world economy is in decline.
This was in sharp contrast to their outlook for the United States economy. Six out of 10 executives said they remained positive about the domestic economy, though that was 9 percentage points lower than in the second quarter.
Despite their caution, manufacturers raised their revenue forecast for the next 12 months, to 5.3% from their 4.9% prediction of three months ago.
“U.S. industrial manufacturers became increasingly cautious on the outlook for the global environment as they assessed the impact of the slowdown in China and the strengthening dollar,” said Bobby Bono, PwC’s U.S. industrial manufacturing leader. “Despite the downward turn in overseas sentiment, overall domestic growth prospects remained healthy and manufacturers continue to focus on further strengthening core products and services. They are keeping their cash at home and directing investment toward enhancing their value propositions in an effort to remain competitive and drive future revenues.”
But the U.S. manufacturing economy is not without its challenges. In the latest Beige Book release from the Federal Reserve, the central bank reported that manufacturing was sluggish, with the strong dollar and the drop in energy investments cited as major contributors.
Manufacturing turned in a “mixed but generally weaker performance during the latest reporting period,” noted Lindsey Piegza, chief economist with Stifel, Nicolaus & Co. She pointed out that a number of the bank’s districts reported “adverse effects from the energy sector” and Cleveland, Chicago and San Francisco all reported that the demand for steel “remained weak, with the strong dollar and competition from China cited as factors driving this trend.”
What does the more cautious outlook mean for hiring and spending in the manufacturing sector? The PwC report found:
- Just over a third (37%) of manufacturers plan to add employees in the next 12 months, down from 52% in the second quarter. For those that do have the help wanted sign out, the most sought after employees will be professionals/technicians (25%) and blue collar/skilled labor (23%) PwC reported, “Limited white collar support, middle management and sales/marketing hiring is planned.”
- Major new investments of capital were planned by 37% of manufacturers surveyed, up slightly from the second quarter and the same period last year. The mean investment as a percentage of total sales was a moderately high 5.6%, PwC reported, up from the 3.3% in the second quarter and on par with 5.7% at this time in 2014.
- Operational spending plans also increased, with 82% expecting to increase operational spending, up from 75% in the second quarter and 69% last year. Tops in increased expenditures were: new product or service introductions (48%), research and development (37%), business acquisitions (23%) and information technology (22%).
- Asked specifically about their investment in information technology, 80% of manufacturers reported having a multiyear plan (3-5 years) that addresses business capabilities and processes as well as IT systems, PwC found. Manufacturers reported they were making IT investments primarily to reduce costs (84%) and support growth (72%). Overall, 90% expect to invest in IT technologies over the next 12-18 months, with upgrading infrastructure cited most often (82%).
“In the face of global uncertainty and the impact of a strengthening U.S. currency, management teams continue to focus investment on developing new products and driving innovation in an effort to sustain and build market share,” Bono added. “Companies are doubling down on what they do best and aggressively building their competitive moats. At the same time, they are continuing to pull back from overseas expansion, with only 5% indicating plans to open facilities abroad.”