regarding the direction of the domestic economy over the next 12 months dropped to 46% from the prior quarter’s 60%, and 22 points below a year ago (68%). This represented the lowest level of optimism since 37% was recorded in the third quarter of 2012. Looking at the world stage, only 27% of industrial manufacturers expressed optimism regarding the global economy over the next 12 months, 11 points below a year ago (38%).
As a result of the decreased economic sentiment, the projected average revenue growth rate over the next 12 months among panelists declined to 3.6%, representing a significant deceleration from the prior quarter’s 5.3%. The benchmark represented the lowest revenue growth rate since three percent was recorded in the first quarter of 2011. Despite the lower rate, 70% of panelists still expect positive revenue growth for their own companies in the year ahead, with the majority (65%) forecasting single-digit growth.
“Sentiment among U.S. industrial manufacturers decelerated in the fourth quarter, primarily reflecting the uncertain outlook for the global environment,” said Bobby Bono, PwC’s U.S. industrial manufacturing leader. “The overall economic picture has become more complex as management teams navigate slower growth in China, coupled with a stronger dollar and weak energy prices. Nearly one-third of annual revenue among survey panelists is derived internationally, reflecting the significant exposure of domestic industrial manufacturers to the world economy. Turning more cautious, they are prudently dialing back on the overall level of capital spending and hiring as they prepare to transition to a more challenging business climate. However, a healthy majority still anticipate revenue growth, albeit at a more moderate pace, in the year ahead.”
Barriers to growth and challenges
Looking at perceived barriers to growth, monetary exchange rate has become the leading headwind over the next 12 months, up 11 points sequentially to 49% in the fourth quarter. A year ago, it was 15%, 34 points lower. Other barriers included lack of demand (39%), oil/energy prices (32%), decreasing profitability (29%) and legislative/regulatory pressure (22%). In addition, competition from foreign markets rose to 22%, up 10 points from the previous quarter.
PwC also surveyed respondents on the most prominent challenges in preparing for the year ahead. At the top of the list was the condition of the world economy, which was cited by 80% of respondents, while 67% rated it as a top-three issue. This was significantly higher than the last time this special survey was conducted in 2011. At that time, only 64% cited the condition of the world economy and only 18% listed this challenge among the top-three. Conversely, 71% of panelists flagged higher costs of goods and services as a major challenge, down from 92% in 2011. Additional major challenges cited by panelists included greater opportunities for new product and service introductions (67%), increased price flexibility (62%) and strength of the US dollar (53%).
As a result of the pullback in growth forecasts, manufacturers have continued to take a more conservative approach to hiring. In total, 42% plan to add employees to their workforce over the next 12 months, up from the low of 37% in the third-quarter of 2015, but down from 60% reported a year ago. The total net workforce growth projection was flat this quarter, below last year’s 1.1%, indicating continued cutbacks in hiring among these manufacturing firms.
Among the 42% of panelists planning to hire within the next 12 months, the most sought-after employees will be blue collar/skilled labor (29%) and professionals/technicians (27%). Among professionals/technicians, hiring of technology/engineering employees led the way, while hiring in the blue collar category was split between skilled/specialized workers and semi-skilled workers.
“Industrial manufacturers are continuing to seek avenues to improve productivity, while favoring professionals with strong technical skills,” Bono added. “In a slower growth environment, management teams appreciate the benefits of staying lean while ensuring they have the right talent to harness continued advances in engineering, technology and supply chain management.”
The tempered global outlook has also served to moderate the total level of capital spending plans among U.S. industrial manufacturers. They are continuing to spend, but they are spending less. Overall, 49% plan major new investments of capital during the next 12 months, up from the prior quarter’s 37%, and above last year’s 43%. However, the mean investment as a percentage of total sales dropped to 1.9%, sharply down from last quarter’s 5.6% and the 3.3% a year ago.
Conversely, 86% of respondents plan to increase operational spending over the next 12 months, up four points from both the previous quarter and the comparable period last year. Leading categories were new product or service introductions (44%), research and development (41%), business acquisitions (34%) and information technology (36%). “Given the prospects for a less robust economic climate, management teams continue to focus on investing in what they do best, while fostering innovation in an effort to strengthen their competitive positions,” Bono added.
About the Manufacturing Barometer
PwC's Manufacturing Barometer is a quarterly survey based on interviews with 59 senior executives of large, multinational U.S. industrial manufacturing companies about their current business performance, the state of the economy and their expectations for growth over the next 12 months. This survey summarizes the results for Q4 2015 and was conducted from September 29, 2015 to December 21, 2015. To view the complete Manufacturing Barometer report, visit http://www.pwc.com/manufacturing-barometer. For information about other Barometer surveys, including recent economic trend data and topical issues, visit http://www.barometersurveys.com.