Optimism regarding the direction of the domestic economy rose among U.S. industrial manufacturers during the first quarter of 2014, according to the Q1 2014 Manufacturing Barometer, released today by PwC US. The positive sentiment about the prospects of U.S. commerce in the next 12 months reached the highest level since the fourth quarter of 2005. Conversely, optimism regarding the prospects of the world economy lessened during the first quarter as U.S. industrial manufacturers remained cautious on the global stage.
Optimism around the prospects of the U.S. economy during the next 12 months rose among U.S. industrial manufacturers to 71 percent in the first quarter of 2014, from 68 percent in the previous quarter and 55 percent in the first quarter of 2013. Concurrent with the improved sentiment, uncertainty around the domestic outlook has continued to abate among industrial manufacturers, dropping to 27 percent in the first quarter, representing the lowest level since the first quarter of 2012.
"The level of optimism among industrial manufacturers concerning the direction of the domestic economy continued to rise, with company revenue growth expectations remaining at healthy levels," said Bobby Bono, PwC's U.S. industrial manufacturing leader. "This improved sentiment bodes well for the year ahead, as management teams continue to indicate consistent near-term spending plans, including hiring more workers, supporting new product development and investing in IT and R&D. At the same time, sentiment regarding the outlook for worldwide commerce softened in the early months of 2014, while the level of uncertainty remained elevated. As a result, companies are continuing to focus primarily on investing in core products and services in an effort to expand market share, while taking a cautious approach to longer-term capital investment and overseas expansion."
According to the latest Manufacturing Barometer, overall sentiment about the world's economic prospects among U.S. industrial manufacturers that market abroad weakened somewhat during the first quarter of 2014, with optimism declining to 41 percent from 47 percent in the fourth quarter of 2013. However, global sentiment is ahead of the 36 percent level of optimism recorded in the first quarter of 2013.
Regarding actual company growth expectations, 82 percent of survey respondents expect positive revenue growth for their own companies in the next 12 months, with 15 percent forecasting double-digit gains and only five percent anticipating decreased revenues. The projected average revenue growth rate for own-company revenue over the next 12 months remained consistent at 5.3 percent, compared to 5.4 percent in the fourth quarter of 2013, but well above the 4.3 percent recorded in the first quarter of 2013.
The majority (56 percent) of U.S. industrial manufacturers surveyed plan to add employees to their workforce over the next 12 months. This level is down modestly from the 60 percent indicating hiring plans in the fourth quarter of 2013, but up from 45 percent in last year's first quarter. According to PwC's report, the most sought-after employees will be skilled labor (33 percent), followed by production workers (30 percent) and professionals/technicians (28 percent). In addition, there was an increase in plans to hire white collar support personnel at 20 percent, compared to only seven percent in last year's first quarter.
"While industrial manufacturers have continued to indicate a focus on hiring skilled labor, they are also increasingly concerned about the lack of qualified workers," added Bono. "As the economy continues its growth path and the unemployment rate decreases, we will likely see an increased need for worker training programs aimed at helping companies support expansion, lift production and support innovation."
Plans for operational spending remain consistent, with 75 percent of respondents indicating increased outlays in the next 12 months, up slightly from 73 percent in the fourth quarter and 71 percent in the first quarter of 2013. Over the next 12 months, the leading investment areas include new product or service introductions, information technology and research and development. While near-term operating spending plans remain healthy, indications for longer-term investment remain moderate.
Twenty-eight percent of respondents planned M&A activity in the year ahead, with the majority of that group focusing on purchasing another business, followed by the sale of part/all of their own business or a spin-off. "Supported by strong balance sheets, there has been a gradual increase in sentiment for M&A among industrial manufacturers, pointing to some potential for increased activity in the year ahead," Bono stated. Looking at other business initiatives, 18 percent of respondents indicated plans to expand into new markets abroad, while 13 percent planned to invest in new facilities abroad.
Among the survey findings, lack of demand was cited as the leading potential barrier to growth in the next 12 months for 44 percent of respondents. This was followed by concerns about legislation/regulatory pressures, as indicated by 38 percent of respondents. Concern about capital constraints was mentioned by 28 percent of respondents, up notably from 17 percent in the fourth quarter. In addition, concerns about lack of qualified workers and potential decreasing profitability both rose to 28 percent of respondents, from 20 percent in the fourth quarter.
Special Topic: Impact of Lower Energy Costs
The latest Manufacturing Barometer revealed that 42 percent of industrial manufacturers anticipate lower overall energy costs over the next two to three years. Among other findings, the Barometer revealed that while 62 percent believe lower energy prices will have a positive impact on the U.S. economy, only 39 percent believe it will have a positive impact on the U.S. job market and new hiring. Fewer, 33 percent, believe it will bolster their own companies' revenues.
A majority (75 percent) of respondents noted that the most probable use of an "energy premium" by their own company would be to create higher bottom-line profits. A net 53 percent indicated they will likely seek to expand their own businesses in new markets abroad (41 percent), existing markets (37 percent), and/or new markets in the U.S. (30 percent). This was followed by improvement of supply chain (49 percent), while development/upgrade of manufacturing systems was cited by 39 percent of respondents. However, only 32 percent believe an energy premium would lead to an increased workforce/additional new hiring, and only 18 percent would likely increase capital spending.
"Only 18 percent of industrial manufacturers confirmed that the benefits of reduced energy costs would likely lead to increased capital spending, in line with the conservative stance to long-term capital outlays we are seeing across the industry," noted Bono. "While U.S. industrial manufacturers are investing in operational improvements and product development, they also remain focused on guarding against risk, maintaining strong balance sheets and supporting profit margins."
About the Manufacturing Barometer
PwC's Manufacturing Barometer is a quarterly survey based on interviews with 61 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 Q1 2014 and was conducted from January 9, 2014 to April 2, 2014. 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.
About PwC's Industrial Products practice
PwC's Industrial Products (IP) practice provides financial, operational, and strategic services to global organizations across the aerospace & defense (A&D), business services, chemicals, engineering & construction (E&C), forest, paper, & packaging (FPP), industrial manufacturing, metals, and transportation & logistics (T&L) industries. With more than 31,000 professionals located in over 150 countries, PwC's IP global professionals deliver a wide range of industry-focused tax, assurance, and advisory services to address critical business issues. For more information please visit: www.pwc.com/us/en/industrial-products.
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