Report: Manufacturers' Optimism Reaches Record Low

PricewaterhouseCoopers’ Manufacturing Barometer indicates energy prices and lack of demand at the top of industrial manufacturers’ concerns for economic growth.

NEW YORK — Reflecting the concerns about a softening U.S. economy, only 29 percent of American industrial manufacturers responding to the fourth quarter PricewaterhouseCoopers’ Manufacturing Barometer say they are optimistic about the prospects for growth in the coming year, down from 64 percent one year ago.
This is the lowest level of domestic optimism recorded since the inception of the Barometer in the third quarter of 2003.

Consistent with previous quarters, oil and energy prices are considered the leading barrier to company growth among two-thirds (66 percent) of industrial manufacturers. Concerns over lack of demand (61 percent) and a lower monetary exchange rate (44 percent) both showed significant increases as potential barriers to future growth.

The majority of manufacturers who are concerned about oil and energy showed increased concern for other key barriers to growth, including demand (67 percent, 17 points higher); competition from foreign markets (51 percent, 21 points higher); and monetary exchange rates (49 percent, 14 points higher).  A greater number cited both higher costs (69 percent, 19 points higher) and higher prices (59 percent, 19 points higher) in Q4 2007 than their non-vulnerable counterparts.

On the positive side, more executives in the oil/energy vulnerable segment are planning major new investments of capital (44 percent, 9 points higher) and M&A initiatives (49 percent, 14 percent higher).

“Amidst anxieties about a possible recession and the impact of the credit crunch, U.S. manufacturing executives are increasingly pessimistic about the domestic economy as forecasted in the Barometer,” said Barry Misthal, partner and industrial manufacturing sector leader, PricewaterhouseCoopers.  “With concerns about higher energy prices and a lack of future demand at all-time highs, bright spots are becoming harder to find in an increasingly dim outlook.”

On the international front, 64 percent of manufacturers responding last quarter had a positive outlook on the world economy, in line with 69 percent of executives who cited international optimism in Q4 2006. Only six percent of respondents cited a negative outlook about the international economy during the fourth quarter of 2007.
The positive global outlook is due largely in part to international sales projections, which are estimated at up to 33 percent of total revenue.

Of those manufacturers reporting international transactions, nearly two-thirds (64 percent) experienced an increase in their sales abroad. As a result, 81 percent of executives expect positive revenue growth during the next 12 months. However, overall revenue targets have been reset from 6.5 percent in the prior quarter to 5.4 percent in Q4.

Hiring plans are in line with one year ago, with 36 percent of executives planning to add workers over the next 12 months, a 16 point drop from the previous quarter’s 52 percent.

The minority of executives who are expanding their workforce are a notably faster-growing segment, expecting 8.8 percent revenue growth over the next year versus 3.5 percent for those not hiring.

Despite concerns over a deflating U.S. dollar, over half (53 percent) of industrial manufacturers have undertaken outsourcing of manufacturing to low-cost countries or plan to do so over the next year.

However, most executives scaled back plans for major new investments of capital, with only 41 percent planning major investments over the next year.

Of those planning increased expenditures, information technology (48 percent) and new product/service introductions (43 percent) were most common.

“With a weak U.S. dollar and a potential downturn in the economy, executives have legitimate reasons to scale back on future plans and focus on their business prospects abroad," explained Misthal. "The unknown is whether the strength of those international sales, plus the existence of a solid minority who continue to hire and invest capital, will be enough to reverse the current industry pessimism in future quarters."
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