Industrial Manufacturers Feeling Better About U.S. Economy ... Sort Of

Industrial manufacturers are feeling better about the U.S. economy heading into 2007, but they're not exactly exuberant.

Industrial manufacturers are feeling better about the U.S. economy heading into 2007, but they're not exactly exuberant.

PricewaterhouseCoopers' quarterly Manufacturing Barometer survey, released Thursday, shows that 64 percent of the 61 executives at large, U.S.  industrial manufacturers who were interviewed were more optimistic about the economy, up from 45 percent in the third quarter. Optimism about the global economy also improved, to 69 percent from 58 percent.

While expectations are on the rise, however, slower revenue growth is nevertheless expected. Growth projections for the next 12 months dropped to 6.2 percent from 7.3 percent in the prior quarter - the lowest projected growth reported since the first quarter of 2004.

“Optimism in the sector peaked during the fourth quarter of 2005 as manufacturers planned major new investments and increases in their workforce,” said Barry Misthal, PricewaterhouseCoopers' Industrial Manufacturing sector leader. “Optimism waned throughout 2006, bottoming out in the third quarter, most likely a result of continued high energy costs. Executive optimism bounced back this most recent quarter, but with moderated growth projections. The biggest challenge for them now is creating sustainable businesses that will prosper long-term.”

Planned major new investments as a percent of revenue over the next 12 months remained steady at 6.5 percent, in-line with the prior quarter's 6.6 percent. However, that number is down significantly from the year-ago level of 9.8 percent, PwC said.

Hiring plans showed a continued downturn in those planning to add new workers. A year ago, 61 percent expected to increase their workforce over the coming year, but the survey showed just 33 percent now plan to do so. Those planning to decrease their workforce have risen slightly to 12 percent from 7 percent over that same time period.

PwC said the executives are still concerned about demand, though the level of concern fell off to 39 percent from 48 percent in the prior quarter. And, despite lower oil prices in recent months, oil/energy prices remained the leading potential barrier to growth over the next 12 months, rising from 48 percent to 62 percent of manufacturers, in line with the first half of 2006.

Meanwhile, concern about legislative/regulatory pressures rose to 34 percent from 25 percent, and new anxieties about taxation policies rose to 20 percent from eight percent.

Increased investments are planned for over the next 12 months in a wide range of areas, led by new product/service introductions (43 percent), geographic (43 percent) and facilities expansion (41 percent), IT (39 percent) and business acquisitions (34 percent).

The survey revealed that fewer firms reported cost increases in the fourth quarter, and fewer reported price increases.

The survey also asked the manufacturing executives about plans to reduce risks in the supply chain. The responses showed that most large manufacturers already have built-in redundancy plans for their IT networks (79 percent), and another two percent have plans to implement them over the next year-and-a-half. Eleven percent have no plans to do so, and eight percent were uncertain or not reported.

PwC said redundant sourcing of critical parts is being addressed by 69 percent of those surveyed - 64 percent already have and 5 percent are planning - and a similar percentage has addressed the creation of backup plans in the case of natural disaster, terrorist attack or other geopolitical issue. Interestingly, the strategy of built-in redundancy for transportation logistics has been addressed by just 43 percent.

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