With expectations that economic growth will continue in 2014, U.S. industrial manufacturers expressed optimism about the U.S. economy, and more importantly, toward the broader world economy, which has reached the highest level since the fourth quarter of 2010, according to the Q4 2013 Manufacturing Barometer, released by PwC US. Looking ahead, respondents appear poised for growth as a majority expect positive revenue gains at their own companies; plans for hiring remain steady; international sales regain momentum; and the headwinds to growth begin to level off.
Optimism regarding the prospects of the U.S. economy during the next 12 months rose among U.S. industrial manufacturers to 68% in the fourth quarter of 2013, from 60% in the previous quarter. Compared to the fourth quarter of 2012, 20% more of the executives surveyed are now optimistic about the domestic economy.
“Optimism regarding the U.S. economy continued to increase in the fourth quarter, while views of the worldwide economy, although improving, remain divided given continuing levels of uncertainty. Our Global Manufacturing Current Assessment and Outlook indices tell us that executives are generally more positive in regard to the economic environments in which they operate, but aren’t seeing significant improvement in financial results to make large investments in their businesses,” said Bobby Bono, U.S. industrial manufacturing leader, PwC. “As we continue to see the global macroeconomic environment improve, we expect U.S. industrial manufacturing executives, bolstered by strong balance sheets, to more aggressively compete for businesses in international markets and increase capital expenditures.”
According to the latest Manufacturing Barometer, overall sentiment about the world’s economic prospects among U.S. industrial manufacturers who market abroad also increased in the fourth quarter of 2013, rising to 47% from 40% in the third quarter and 32% in the fourth quarter of 2012. While nearly half of survey participants expressed optimism, an additional 46% remain uncertain about global prospects and 7% remain pessimistic.
Reflecting the increased confidence level about the worldwide economy, international revenue regained upward movement in the fourth quarter of 2013 as 29% of respondents reported increased international sales, up from 18% the prior quarter. “The expected contribution of international sales to total revenues over the next 12 months also showed a slight tick upward. The rise of global optimism may signal increasing contributions as these international marketers see an improving economic picture in Europe and in emerging markets,” Bono continued.
Underscoring the increased confidence levels overall, 85% of survey respondents expect positive revenue growth for their own companies in 2014, with 13% forecasting double-digit gains and only 3% expecting negative growth. The projected average revenue growth rate for own-company revenue during the next 12 months increased to 5.4% in the fourth quarter of 2013 from 4.2% in the previous quarter.
Plans for operational spending in 2014 dipped slightly; 73% of U.S. industrial manufacturers planned on increasing operational spending during the fourth quarter of 2013, a decrease of 5% from the third quarter. Throughout the next 12 months, the leading increased investment areas include new product or service introductions (45%), research and development (37%) and information technology (32%). Twenty-three percent of respondents planned M&A activity in the year ahead, focusing on purchasing another business, sale of part/all of own business or a spin-off. In addition, expansion into new markets abroad increased slightly to 20% with 8% citing plans for new facilities abroad, which was offset by 10% planning to close/reduce facilities overseas.
Building off of the previous quarter’s five-year high, the majority of U.S. industrial manufacturers surveyed plan to add employees to their workforce during the next 12 months. Up two points from the previous quarter, 60% of respondents in the fourth quarter of 2013 plan new net hiring in 2014, but will do so at a more moderate pace. Only 3% plan to reduce the number of full-time equivalent employees and 37% will stay about the same. The most sought-after employees will be skilled labor (42%), followed by professionals/technicians (30%) and production workers (28%).
Among the survey findings, legislation/regulatory pressures and concern about lack of demand were the most cited potential barriers to growth throughout the next 12 months, totaling 47% and 42% respectively. While lack of demand remains a concern among U.S. industrial manufacturers, it is down 10% from a year ago, when it was considered the primary barrier to growth. In addition, several other barriers are lower than a year ago, including oil/energy prices (25%), taxation policies (22%) and decreasing profitability (20%), while concern regarding capital constraints and competition from foreign markets increased from the same period last year.
“As the shale energy revolution continues to ramp up in the U.S., we are seeing significant moderation in concerns regarding energy costs among industrial manufacturers, reflecting the positive influence that shale gas is having from investment, operational and demand standpoints. The low-cost energy also provides a significant incentive for manufacturers to shorten their supply chain and bring production facilities back to the U.S.,” Bono said.
Special Topic: Cyber-security and IT innovations
Cyber-security continues to be a major area of focus for industrial manufacturers. The latest Manufacturing Barometer revealed that 75% of U.S. industrial products manufacturers claim to have a methodology to detect the effectiveness of their organization’s security programs and 82% cited having a formalized plan in place for reporting and responding to cyber-security events. During the past 12 months, only a limited number (15%) reported an increase in cyber-security events. When polled, U.S. industrial manufacturers cited hackers as the greatest cyber-security threat to their business (69%), followed by current/former employees (26%) and activists/activist organizations (7%).
Of survey respondents, 38% indicated that their business made use of important IT innovations in the past 12 months, while 51% responded that their business had not. The two business sectors leading the way for important IT innovations were manufacturing processes (52%) and security/cyber threats (43%).
“U.S. industrial manufacturers are embracing IT innovations to both mitigate risks and improve their long term prospects. In addition to IT investments to combat cyber and information threats, we are seeing manufacturers adapt new technologies and innovations including cloud and mobile computing, and big data and analytics. These important IT investments are helping forward-looking businesses guard against disruptive technologies that are changing the manufacturing landscape while providing them with an opportunity to adjust their business models, improve their processes and find new opportunities to grow,” Bono stated.
About the Manufacturing Barometer
PwC's Manufacturing Barometer is a quarterly survey based on interviews with 60 senior executives of large, multinational U.S. industrial manufacturing companies about their current business performance, the state of the economy and their expectations for growth during the next 12 months. This survey summarizes the results for Q4 2013 and was conducted from Oct. 1, 2013 to Jan. 8, 2014. To view the complete Manufacturing Barometer report, visit http://www.pwc.com/manufacturing-barometer. For information about other Barometer surveys, including recent economic trend data and topical issues, visit http://www.barometersurveys.com.