The first-quarter edition of the PricewaterhouseCoopers LLP Manufacturing Barometer reported a slight uptick in economic optimism among U.S.-based industrial manufacturers, with 16% of executives polled expressing optimism about the U.S. economy over the next 12 months, up 11 points from the previous quarter. More than half the respondents (55%) remain pessimistic about the U.S. economy, which is an improvement from the 70% who were pessimistic last quarter.
Anxieties over international prospects remain high amidst the global recession, as 98% of manufacturers marketing abroad agree that the global economy declined in Q1. International sales turned increasingly negative in the first quarter, with more than half (60%) of respondents reporting decreased international sales from Q4 2008. The expected contribution of international sales to total revenues over the next 12 months remained at 36%, which is on-pace with last year's findings (35%). But, overall revenues will be lower.
"The wide-scale fears of declining international sales, as we reported in previous Manufacturing Barometers, were finally realized during the first quarter of 2009," said Barry Misthal, partner and industrial manufacturing sector leader at PricewaterhouseCoopers. "Manufacturing executives are hoping to ride out 2009 with a focus on making their companies leaner and more efficient, while aligning inventories to match lower demand levels. Taking these kinds of cautionary measures should position manufacturers for a more auspicious start to 2010."
As international prospects remain uncertain, plans for geographic expansion were severely reduced — indeed, only 13% of respondents cited such plans. A mere 15% of U.S. manufacturers are planning M&A activity over the next year and only 18% are planning to expand to new markets abroad.
Looking beyond 2009, senior executives are preparing for a possible turnaround in early 2010. This is reflected in the average revenue growth projections of respondent companies for the next 12 months, which were reported at minus 0.7% in Q1 versus the minus 2.4% revenue growth projections reported in Q4 2008. Despite declining international sales and uncertainty about the domestic and global economies, 34% of manufacturers are expecting positive revenue growth for their own companies over the next 12 months, while 27% project negative growth. However, only 13% of manufacturers expect positive growth in 2009, and average revenue growth is expected to drop to an all-time low of minus 9.1% for the year.
The Barometer reports that manufacturers are scaling back plans for major new investments, with less than a quarter (24%) planning such expenditures over the next year, a sharp drop from the 52% reporting new investments a year ago. However, more than half (53%) are increasing operational spending in an attempt to stabilize their businesses, with the majority of manufacturers (29%) planning to focus on new product and/or service introductions.
Concern about basic market demand is now the chief potential barrier to growth for U.S. manufacturers, reported by an overwhelming 95% of respondents — up 33 points from one year ago. Decreasing profitability is the second highest concern for manufacturers, cited by 69% of respondents. In contrast, concern about oil/energy prices has plummeted to a low of 21% as commodity prices leveled off significantly during the past year. Also of note, competition from foreign markets was reported as the chief potential barrier to growth by 39%, up 14 points from last quarter, as international markets tighten.
The survey found that nearly half (49%) of manufacturers polled reported decreasing costs, while only 13% experienced increasing costs during the quarter. In addition, 47% of U.S. manufacturers reported lower gross margins and only 15% reported higher gross margins in the first quarter. The slowdown in demand, coupled with declining costs and gross margins, prompted 34% of executives to reduce their prices.
On the workforce side, manufacturers are bracing for a tough year ahead, as more firms plan staff reductions over the next year. Of those surveyed, 42% plan to reduce their workforces, up 7 points from Q4 2008 and up 27 points from Q1 2008. However, layoffs will occur at a slower pace, as composite workforces are expected to be cut back by 1.8%, as opposed to the minus 3.2% cited in Q4 2008.
"Low demand forces the reduction of inventories, which means that manufacturers will be operating on a conservative basis through the summer months," explained Misthal. "However, manufacturing projects, and activity should resume in the fall, when new orders are typically placed. We believe we'll see a rebound in hiring plans, along with inventory replenishment in the coming year — assuming that demand picks back up by year-end 2009."
Views on the TARP program
This quarter, the Barometer queried U.S. manufacturing senior executives about their views on the government Troubled Asset Recovery Program (TARP). Responses show that the majority of manufacturers (78%) believe TARP will have a positive impact on businesses, but over a longer period of time (70%). Only 10% believe that TARP has already been effective in bringing liquidity to the credit markets and 36% believe it will become effective over the next 6 months.
In terms of their own companies, 60% of respondents do not believe that the government bailout/TARP program will benefit their own company within the next six to 12 months; only 16% believe it will be beneficial in the short term.
"Manufacturing executives' views on the TARP program provide further evidence that these firms are taking a long-term view about what business success will entail, and executives are carefully and strategically planning for the challenging year ahead," added Misthal.