U.S. industrial manufacturers are maintaining their optimism about the direction of the domestic economy in the second quarter of 2014, according to the Q2 2014 Manufacturing Barometer, released by PwC US.  This report indicates a rise in capital spending plans among industrial manufacturers as they focus on using their cash positions to strengthen their products, add personnel and secure technology in competitive markets.

“We saw a notable increase in indications for both long-term capital investment and short-term spending plans during the second quarter,” said Bobby Bono, PwC’s U.S. industrial manufacturing leader.   “Companies have maintained historically high levels of liquidity and are increasingly looking to put this money to work in strengthening their operations, adding talent and improving technology in a highly competitive marketplace.  Plans for R&D spending reached the highest level in the past five quarters, as management teams look to differentiate their products and enhance the value proposition they offer to their customers.  This comes against a backdrop of sustained optimism regarding the domestic economy, coupled with a continued high level of uncertainty regarding the direction of global commerce.”

Regarding actual company growth expectations, 77 percent of survey respondents expect positive revenue growth for their own companies in the next 12 months, with nine percent forecasting double-digit gains and none anticipating decreased revenues.  The projected average revenue growth rate for own-company revenue over the next 12 months was 5.2 percent, consistent with last quarter’s 5.3 percent, and above the 4.6 percent recorded in the second quarter of 2013.

Plans for new investments of capital rose notably during the second quarter of 2014, with 52 percent of respondents indicating increased outlays in the next 12 months, up from 39 percent in the previous quarter and 40 percent in the second quarter of 2013.  The mean investment as a percentage of total sales was also slightly higher than the prior quarter’s 5.4 percent, at 5.7 percent.  Operational spending plans remained high with 75 percent of respondents indicating increased short-term spending in the next 12 months, identical to the second quarter.  Plans for spending on research and development rose significantly to 45 percent, from 34 percent in the first quarter and 38 percent in the second quarter of 2013.  Other areas of investment focus included new product or service introductions (43 percent) and information technology (33 percent).

The Q2 Manufacturing Barometer also indicated a notable rise in plans for M&A spending.  Thirty eight percent of respondents planned M&A activity in the year ahead, compared to 28 percent in the first quarter and 23 percent in the second quarter of 2013.  The majority of that group is focused on purchasing another business, followed by the sale of part/all of their own business or a spin-off. 

“The intense competitive environment combined with strong balance sheets at many companies is leading to an increased interest in M&A among industrial manufacturers. Companies are doubling down on what they do best, and are primarily looking to tap their cash to further strengthen their core product offerings, rather than entering new markets or expanding abroad,” Bono continued.

Regarding hiring, 48 percent of U.S. industrial manufacturers surveyed plan to add employees to their workforce over the next 12 months.  This is down from 56 percent in the previous quarter, but remains above the 42 percent reported in last year’s second quarter.  Consistent with the previous quarter, the most sought-after employees will be skilled labor (32 percent), followed by production workers (27 percent) and professionals/technicians (20 percent). Conversely, plans to hire sales and marketing professionals dropped to eight percent in the second quarter from 15 percent in the first quarter.  Plans to hire white collar support also decreased to eight percent in the second quarter from 20 percent in the first quarter.

Among the survey findings, the major headwind to growth over the next 12 months is now seen as legislative/regulatory pressures, rising nine points to 47 percent from a low in the first quarter of 38 percent, but still well below the 53 percent recorded in last year’s second quarter.  Lack of demand was cited as the second leading potential barrier to growth in the next 12 months for 42 percent of respondents.  This was followed by competition from foreign markets and oil/energy prices, which were both cited by 28 percent of respondents.  Conversely, concerns regarding capital constraints dropped to 17 percent of respondents, compared to 28 percent in the first quarter.