Cautious Optimism for 2010

There is cautious optimism to report for both the U.S. and the global economy, according to the latest edition of the PricewaterhouseCoopers LLP Manufacturing Barometer. Nearly half (47 percent) of survey respondents are optimistic about the U.S. economy’s prospects, whereas only five percent were optimistic a year ago. Similarly, 41 percent of panelists who sell internationally are optimistic about the prospects for the world economy, compared to only four percent a year ago.

Indicating a continued hint of optimism, 35 percent of panelists believed the U.S. economy grew in Q4 2009, up 22 points from the prior quarter. Only 15 percent believed it declined, while the prevailing opinion (50 percent) was that the U.S. economy remained unchanged. In regards to the world economy, the most typical view was that it remained unchanged (46 percent) for the second straight quarter. However, 34 percent viewed the world economy as growing, while 20 percent believed it was declining.

Thirty eight percent of industrial manufacturers that sell abroad reported an increase in international sales, up 16 points over last quarter. Industrial manufacturers’ average revenue growth for calendar year 2009 ended with a double digit loss (minus 11 percent), with only 20 percent reporting positive growth. However, the majority (57 percent) forecast positive revenue growth for their own companies in 2010, with 19 percent forecasting double digit growth.

Looking ahead, 47 percent of respondents are optimistic about the 12 month outlook for the U.S. economy, similar to the prior quarter. Only ten percent remain pessimistic, and 43 percent are uncertain. This level of cautious optimism is in sharp contrast to a year ago, when 70 percent were pessimistic. Similarly, 41 percent of those surveyed who market abroad are optimistic about prospects for the world economy, 50 percent are uncertain, and only nine percent are pessimistic.

“We are beginning to see cautious optimism about the economy in the industrial manufacturing sector,” said Barry Misthal, U.S. industrial manufacturing leader for PricewaterhouseCoopers. “There is a sense that the worst is over, but recovery will be slow. These manufacturing executives are still facing a significant challenge to their growth targets, from a lack of demand. The industry needs improved momentum in the overall business climate, and a reduction in regulatory and legislative pressures.”

Concern about lack of demand remains the chief barrier to growth over the next 12 months for 75 percent of industrial manufacturers interviewed. Other areas of great concern include taxation policies at 53 percent, legislative/regulatory pressures at 52 percent, and decreasing profitability, 42 percent.

Thirty percent of those surveyed plan to add employees to their workforce over the next 12 months, and only 12 percent plan to reduce the number of full time equivalent employees (down 16 points from last quarter). Of the 30 percent of respondents planning to hire within the next 12 months, the most sought after employees will be professionals/technicians (23 percent). Inventory remained down for 49 percent of U.S. based industrial manufacturers, and up for only 12 percent, for a net minus 37 percent. This indicates that the anticipated inventory buildup has not begun as of Q4 2009.

While many U.S. based industrial manufacturers are planning new capital investments, the report’s findings indicate a moderate investment rate. Looking at the next 12 months, 35 percent plan major new investments of capital, compared with 37 percent last quarter and 33 percent last year. In the next 12 months, 65 percent of industrial manufacturers plan to increase operational spending, similar to last quarter’s 68 percent. Among increased expenditures, new product or service introductions and research and development lead the way (37 percent each). Geographic expansion rose five points to 27 percent, but business acquisitions dropped ten points this quarter to 23 percent.

Overall, signs of recovery in terms of project restarts and rehiring are beginning to appear, but companies will proceed cautiously and conservatively in 2010, with an eye to the future.