Industryweek 7543 Economic Forecast1

US Manufacturers: In Us We Trust

Oct. 7, 2014
U.S. manufacturers strengthen revenue forecasts for the year ahead but express growing concern over geopolitics and domestic regulatory burden.

U.S. manufacturers may not trust the economy, or the situation overseas, but they’re increasingly bullish about prospects for their own businesses.

Executives at large U.S. manufacturing firms raised their forecast for growth over the next 12 months to an average 5.6%, up from the 5.2% they predicted just three months ago, according to the Q3 2014 Manufacturing Barometer from PwC. That handily beats the 4.2% growth estimate from a year ago.

Looking ahead, 86% of the manufacturers surveyed said they expect positive revenue growth, up 9 points from the second quarter forecast.

But it was a more pessimistic outlook when manufacturers were asked about the situation outside their plant gates. While still positive about the U.S. economy, those optimistic about the economy in the year ahead dropped 8 points to 57%, 3 points lower than a year ago.

Manufacturers were decidedly gloomier about global prospects. Only 30% were optimistic about the international economy, 10 points lower than a year ago.

"As the year progresses, we've seen an elevation of geopolitical concerns across the world, which is adding complexity to management decision-making," said Bobby Bono, PwC's U.S. industrial manufacturing leader. "Despite notable growth thus far for the industrial manufacturing industry and many bright spots regarding company performance, we believe management teams are taking a more conservative approach to cash outlays as they assess recent events and seek to gauge the direction of the global economy."

Looking at international sales prospects for their firms, manufacturers projected a slight drop, from 32% to 30%, for revenue contribution from selling abroad in the next year. In the third quarter, 15% said international sales would be higher while only 8% said they would drop, and 78% said sales abroad were the same.

Just over half (52%) said they expect to increase their workforce over the next 12 months. Some 39% expect to keep their workforce numbers the same, while 9% are planning reductions.

Manufacturers remained cautious in the post-recession period about spending. Plans for major capital expenditures dropped sharply, from 52% in the second quarter to 36% in the current survey. Operational spending remained strong at 69% but was down 6 points from the previous quarters. Manufacturers told PwC they were spending money on new product or service introductions (36%), IT (29%) and geographic expansion (19%).

What’s keeping manufacturers up at night? Survey respondents said the biggest barrier to growth was legislative/regulatory pressures, up 12 points to 59%, followed by lack of demand (43%). Executives expressed greater concern for taxation policies (31%) and higher interest rates (14%). Concern about energy prices was down 6% to 22%, while 26% said they were worried about a lack of qualified workers.

In the third quarter, gross margins were higher, and fewer manufacturers – 22% compared to 27% 3 months ago – were concerned about profitability.

Triggers to Growth

In the latest survey, PwC asked manufacturing executives what would trigger increased investment and growth for their firms. The top choice was lower costs of raw materials (51%), followed by new products or service innovations (43%). About one in four manufacturers also cited market expansion in the U.S. and reduced government regulation.

Other growth stimulants: increased availability of capital to middle-sized businesses (25%), market expansion abroad (19%), reduced energy costs (13%) and strategic alliances or joint ventures (11%).

For the U.S. economy, 59% of executives said a U.S. manufacturing resurgence, including 3-D printing and robotics, would be a major trigger to greater demand and growth. The next two major triggers cited were greater capex spending among public and private businesses (49%) and revival of the U.S. housing market (47%).

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