Optimism Rises Among U.S. Manufacturers; Supply Chain Seen as Critical to Recovery

While a majority of respondents to the third-quarter survey view the U.S. and global economies as unchanged or declining, the overall outlook on how the economy will look by the second half of 2010 is optimistic.

For the past four quarters, an overwhelming majority of respondents viewed the economy as declining. In the third quarter, fewer industrial manufacturers are taking this view, with only 23% believing the U.S. economy declined this quarter (down 40 points from last quarter's 63%). Also, 13% believed the U.S. economy actually grew. On the world economy, only 25% continued to view it as declining, down 41 points from last quarter. Additionally, 29% view the world economy as growing, up 18 points over last quarter’s findings.

Looking ahead, 48% are optimistic about the U.S. economy’s prospects, while only 13% are pessimistic. This marks a decrease in pessimism from this time last year, when 66% of respondents were pessimistic. Similarly, among those respondents doing business abroad, 45% of respondents are now optimistic about prospects for the world economy, and only 13% are pessimistic. A year ago, 63% were pessimistic about the world economy over the next 12 months.

For the next 12 months, the projected average growth rate is 2.2%, notably better than the prior quarter’s projected -0.4%.

However, two concerns rose sharply in the latest report: legislative/regulatory pressures (58%, up 16 points) and taxation policies (53%, up 10 points).

Nevertheless, capital constraints dropped sharply to 22% as a potential barrier for growth over the next 12 months. Plans for major new investments of capital over the next 12 months were notably higher at 37%, a jump over last quarter’s 27% and slightly above last year’s 34%.

In the next 12 months, more than two-thirds of respondents (68%) plan to increase operational spending, rising 15 points over last quarter’s 53%. The areas in which respondents anticipate focusing increased budget expenditures include new product or service introductions (40%), research and development (35%) and business acquisitions (33%).

While workforce reductions are still expected over the next 12 months, plans to hire have increased, and the rate of layoffs is notably lower compared with last quarter. Over the next 12 months, 25% of respondents plan to add workers (up 8 points from last quarter and more than double last year’s 12%). Of the 25% planning to hire, the most sought-after employees will be professionals/technicians, white-collar workers and sales/marketing people. Twenty-eight percent of respondents plan to reduce the number of full-time employees, marking a 2-point dip from last quarter, and 47% expect to stay about the same.

Additionally, the Manufacturing Barometer revealed that 40% of respondents are experiencing higher gross margins, and 25% reported them lower, which is a net 15% with higher margins. This figure marks the first positive net change since fourth quarter 2007 and a reversal of last quarter, when a net 22% reported lower margins. Costs and prices remained lower as well, with only 15% of U.S.-based industrial manufacturers reporting higher costs, while 43% reported lower costs. Only 17% raised prices, compared to the 27% that lowered them.

Overall, three-fourths of respondents expect to have recovered by the second half of 2010. Respondents identified three critical areas they believe will be important to leverage to prepare for a recovery: operational efficiency/cost reduction; supply chain management; and finances, working capital and liquidity. Talent management and distribution ranked high, as well.

Each quarter, PricewaterhouseCoopers interviews more than 500 CEOs, CFOs and managing directors of U.S.-based businesses for its Barometer surveys.