According to PwC’s Q2 2013 Manufacturing Barometer, optimism among U.S. industrial manufacturers regarding the domestic economic outlook rose to 63% during the second quarter of 2013, up from 55% in the first quarter and representing the highest level since the first quarter of 2012. In addition, 72% of respondents believed the U.S. economy grew in the second quarter, up 10 points from the prior quarter. At the same time, sentiment pertaining to the world economy remains guarded with only 31% expressing optimism and 59% voicing continued uncertainty.
The spread between those optimistic about the domestic economy versus those optimistic about the global economy over the next 12 months was 32%, representing the second highest quarterly total since these questions were first asked in the third quarter 2003 survey. At the same time, PwC’s Global Manufacturing Current Assessment and Outlook indices show a reduction in overall pessimism among manufacturing executives compared to the first quarter, which appears to be driven by more bullishness over total sales, driven by the U.S., offsetting in part increasing bearishness over international sales.
“There remains a persistent dichotomy in viewpoints regarding the outlooks for the U.S. and world economies. Optimism regarding the domestic economy has increased, while worldwide economic sentiment remains restrained, with global uncertainty reaching the highest level in the past 12 months,” said Bobby Bono, U.S. industrial manufacturing leader for PwC. “The U.S. is starting to show signs of healthy demand trends and improving pricing power, supporting positive overall sentiment in the year ahead. However, as a result of the mixed global outlook, combined with the moderate domestic recovery and the specter of increased legislative and regulatory pressures, management teams are continuing to carefully manage their costs, while maintaining a focus on growing profitably.”
Reflecting the healthy level of optimism pertaining to the domestic economy, 82% of industrial manufacturers surveyed expect positive revenue growth for their own companies in the next 12 months, with only 3% forecasting negative growth. The projected average revenue growth rate over the next 12 months was 4.6%, up from 4.3% in the first quarter, but down from 5.6% in last year’s second quarter. Despite the reduced rate of forecasted growth, the outlook for the U.S. continues to contrast with the international picture, where optimism regarding commerce in the next 12 months was only 31%, compared to 36% in the first quarter. In addition, the projected contribution of international sales to total revenue over the next 12 months remained low at 32%, consistent with the first quarter survey, but down from 37% in the second quarter of last year.
With regard to capital spending, 40% of respondents plan major new investments during the next 12 months, off three points from 43% in the first quarter, but well below the 55% recorded in the second quarter of 2012. The mean investment as a percentage of total sales of 4% was also lower than the prior quarter’s 4.8%, indicative of moderate spending among respondents, and reflecting in part a reduction in planned spending increases from the peak post-recessionary period, which benefitted from pent-up demand.
Plans for operational spending also remained notably below prior year levels. Looking at the next 12 months, 73% of respondents plan to increase operational spending, similar to 71% in the first quarter, but down from 87% in the second quarter of last year. Leading increased expenditures were new product or service introductions (45%) and research and development (38%). Plans for geographic expansion remained low at 15%, up from 10% in the first quarter, but down significantly from 33% last year.
“Sustained global uncertainty has likely led the way in fostering a more measured approach to capital spending, in conjunction with a return to more normalized spending patterns commensurate with the current stage of the post-recession cycle,” continued Bono. “We are also continuing to see little enthusiasm for overseas expansion, while management teams target spending primarily on R&D, new product launches and IT. This suggests they are focusing inward on innovation and leveraging their core strengths in a competitive domestic environment.”
According to the latest survey, 42% of industrial manufacturers plan to add employees to their workforce over the next 12 months, off three points from the first quarter. Only 5% plan to reduce the number of fulltime equivalent employees, and 53% will stay about the same. The net workforce projection stayed at plus 0.9%, similar to last quarter’s plus 1%, indicating some new hiring continuity among several of these industrial manufacturing companies. The most sought-after employees will be production workers (23%), skilled labor (23%) and professionals/technicians (18%).
Similar to levels recorded in the first quarter, second quarter survey respondents highlighted legislative/regulatory pressures (53%) and lack of demand (47%) as the biggest barriers for growth over the next 12 months. Oil/energy prices were viewed by 22% as a barrier to growth, a significant drop from 35% in the first quarter and 48% in last year’s second quarter.
“We’re seeing a significant moderation in concerns regarding energy costs among industrial manufacturers, consistent with other recent PwC studies. It appears that the increase in shale oil and gas production domestically is having a positive effect on energy costs and is now impacting strategic planning among some industrial manufacturers. This is a welcome development for management teams given the moderately growing economy and the continued emphasis on controlling costs,” added Bono.
About the Manufacturing Barometer
PwC's Manufacturing Barometer is a quarterly survey based on interviews with 60 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 Q2 2013 and was conducted from April 1, 2013 to June 28, 2013. 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.