Uncertainty About U.S., World Economies Reaches Five-Year High Among U.S. Manufacturers

July 29, 2008
PricewaterhouseCoopers' Manufacturing Barometer survey finds that despite the pessimism international sales projections continue to rise.

Ninety-two percent of senior executives surveyed for the PricewaterhouseCoopers LLP Manufacturing Barometer are pessimistic or uncertain about the U.S. economy's prospects over the next year, a four point rise over the prior quarter and a significant jump from 38% in the second quarter of 2007. Compared to 2% who were pessimistic one year ago, in this quarter 27% expressed pessimism about the prospects for the world economy in the year ahead, an increase of six points from last quarter.

Sizing up the domestic economy, more than two-thirds (77%) of industrial manufacturers reported that they believed it was declining, while only 3% believed it was growing. This is in direct opposition to one year ago, when only 3% believed the economy was declining and 69% believed it was growing.

Looking ahead, only 8% are optimistic about the U.S. economy over the next 12 months, and 40% remain uncertain. Industrial manufacturers remain more pessimistic about the U.S. economy than an all-industry consensus.

Interesting the report showed that 68% of executives still expect positive revenue growth for their own companies over the next year. This is down 16 points from a year ago, but remaining relatively flat compared to the 70% from the prior quarter. Accordingly, revenue targets were reset to 3.7%, a 20% drop from the 4.6% recorded in Q1 and a 35% drop from the second quarter of 2007.

A bright spot was international sales, which remained strong in Q2 remained, increasing for 66% of respondents. Projections for international sales for the upcoming 12 months increased slightly to 38% of total revenue, which is three points higher than both the prior quarter and the level seen in the second quarter of 2007. However, respondents expressed pessimism (27%) or uncertainty (36%) about the world economy over the next 12 months, a drastic increase from 22% a year ago.

High oil and energy prices, coupled with slackening demand, are taking their toll on U.S. industrial manufacturers," said Barry Misthal, partner and industrial manufacturing sector leader at PricewaterhouseCoopers. International sales have been a bright spot for U.S. manufacturers, but dropping levels of optimism in the world economy are not a good sign. A faltering global economy would prolong a return to the above-average growth rates these manufacturers have enjoyed during recent years."

With the price of oil reaching $140 per barrel in the second quarter, it's no surprise that 78% of executives cited oil/energy prices as a potential barrier to growth over the next 12 months, which is a ten point jump from Q1. Concern about lack of demand was cited by 60% of all industrial manufacturers as a barrier to growth, and approximately half cited decreasing profitability and emerging pressure for increased wages, up two points and 20 points, respectively, from the prior quarter. Interestingly, the number of executives citing the monetary exchange rate as a barrier to growth dropped to 40% in the second quarter, down 17 points from the prior quarter.

Of the 78% of executives feeling the impact of oil/energy prices, more reported higher costs and prices, lower margins in the second quarter, and projected notably lower revenues for the upcoming year than the 22% that did not cite oil/energy prices as a big concern. This three-fourths majority projected a growth rate of 1.4% for the next 12 months, a stark contrast from their counterparts who are projecting a growth rate eight times higher at 11.1%.

For access to the complete Manufacturing Barometer report, please visit www.pwc.com/manufacturing. For more information about other Barometer surveys, including recent economic trend data and topical issues, please visit www.barometersurveys.com.

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