Survey shows small to midsized companies are more cautious about economic recovery than larger companies

Source: PRNewswire

Jul 21, 2010

As economic indicators demonstrate the economy is recovering, new research by McGladrey reports larger manufacturers and distributors convey higher optimism than other manufacturers and distributors regarding business conditions. This is due in part to their ability to strengthen their competitive advantage through global engagement and international trade.

However, small and midsized manufacturers and distributors express tempered optimism as they move into the recovery. This stems in part from concern over credit availability, potential raw material and energy cost increases, and cautious investments in inventory.

Of the total 1,061 respondents included in the survey analysis, nearly one-third (32%) of all companies with annual revenue of $500 million or more report their business is "thriving and growing." That percent decreases significantly, however, among companies with less than $25 million in revenue, with only 19% indicating their business is "thriving and growing." Ten percent of all companies polled said their business conditions are declining, a 30% drop from 2009 and the best result in this category since 2007.

"The improvement in business conditions for larger companies is directly related to increased order activity spurred by growing optimism over the economy," said Tom Murphy, executive vice president of manufacturing and wholesale distribution, RSM McGladrey. "But we're still seeing lower levels of inventory and spot shortages in the supply chain given that small and midsized companies remain so risk-averse following the recession."

Nearly half (47%) of companies report that export sales have increased, up four percentage points from 2009. In addition, among those companies that say international sales are key to business growth, 88% anticipate revenue increases in foreign markets. To accomplish this, companies are more likely to broaden their sights outside of traditional U.S. trading partners to other foreign markets, such as Brazil, India and China.

On the domestic front, 71% of business leaders project U.S. sales will rise in 2010, roughly three times the percentage forecast in 2009 (25%). And although the rate of international sales is expected to slow slightly from last year, 44% of companies expect an increase in sales, compared to 21% in 2009.

"Compared to where the U.S. economy was last year at this time, it's not surprising that businesses expect to see domestic sales rise at a sharper rate than international sales in 2010 as the economy improves," said Murphy. "But companies that are already globally competitive — or considering entering global markets — will maintain a significant advantage over those only selling in the U.S. market."

Electronics, Chemicals and Food and Beverage project the highest domestic sales increases. Building Materials and Fabricated Metal segments are less optimistic about near-term growth, but show strong improvements over 2009 levels. Internationally, the segments forecasting the highest sales increases include Electronics, Machinery and Textiles and Apparel.

Nearly half of companies (48%) say they will bolster their workforce in 2010 — triple the percentage of businesses that hired in 2009. Although executives plan to hire across all positions, nearly two-thirds (65%) of distributors and almost half (47%) of manufacturers highlight the need for sales professionals as a priority for 2010.

Both manufacturers and distributors, however, continue to report difficulty finding qualified workers as they did during the recession. "While the country is facing some of the highest unemployment rates in several years, there is a shortage in those who are qualified for skilled positions," says Murphy. "As businesses continue to modernize facilities, invest in new products and improve efficiencies, this need will only increase. And with high levels of unemployment, there's a growing desire to train not only the next generation of skilled workers, but those who were displaced during the economic downturn."

Despite a challenging economy, the majority of businesses remain interested in creating new products and finding more efficient ways of doing business — 95% of respondents say they are investing in innovation, with new product development and product line extensions leading the way.

"Businesses that effectively manage their costs are better equipped to continue investing in areas such as innovation and new market expansion, which results in improved gross margins and positions their companies with a competitive advantage," said Murphy.

Business leaders expressed significant concern over pending policy issues and how it might affect their business operations in the U.S. While much of the legislation has yet to be implemented, the prospect of such change is having an immediate and direct influence on the economic recovery.

"Given the uncertain implications of such changes, many business leaders are taking a 'wait-and-see' approach. As a result, they are not moving as quickly to hire and invest," said Murphy. "This is contributing to a slower recovery."

Respondents identified five leading areas of concern when it comes to policy changes. An overwhelming majority (94%) expressed concern over health care reform, followed by additional regulatory requirements (89%), changing energy policy (81%), the Employee Free Choice Act (81%) and Cap and Trade (80%).