Manufacturing barometer 3Q 2006

NEW YORK, October 30, 2006 — Less than half (45 percent) of US industrial manufacturers are optimistic about the US economy over the next 12 months, down from 63 percent last quarter and 76 percent in the fourth quarter of 2005, according to PricewaterhouseCoopers’ recent Manufacturing barometer. Forty-eight percent view lack of demand as a barrier to growth, equal with oil and energy prices; however, most expect oil prices to level off over the next year.

“This shift in confidence among industrial manufacturers is the result of continued high energy prices, which affects not only the bottom line, but also demand,” said Barry Misthal, a partner in PricewaterhouseCoopers' Industrial Products practice. “In fact, those most burdened by the cost of oil and gas were also most concerned about a lack of demand.”

Those surveyed expected energy costs to even out over the next 12 months. Twenty-eight percent predict a further rise in energy costs, while 22 percent think they will fall. This is a significant change from the first quarter of 2006, when 63 percent expected energy prices to rise.

A majority of companies – 60 percent – are passing along all, most or at least some of their increased energy costs to customers. Despite these pass-through efforts, 53 percent of industrial manufacturers reported a negative impact on their profit margins over the past 12 months due to higher energy costs.

Economic uncertainty was evident throughout industrial manufacturers’ plans for the coming year. Only 47 percent of those surveyed were planning major new investments in this timeframe (compared to 60 percent last quarter) and only 37 percent were planning to add new workers (down from 58 percent last quarter). Sixty-eight percent now believe the domestic economy is growing, compared with 84 percent who believed growth was on the horizon last quarter. However, 85 percent still expected to gain positive revenue growth at an average of 7.3 percent, off slightly from 8.1 percent last quarter.

“U.S. industrial manufacturers are cautious about the economy, causing them to cut back in plans for new investments and hiring,” said Misthal. “In our conversations with executives, we found that many had also scaled back plans for increased research and development, leading to a drop-off in increased investments for new product or service introductions.”

Executives surveyed were more optimistic about the global economy than the domestic economy. Fifty-eight percent were optimistic about the global economy, falling from a recent high of 77 percent in the first quarter of 2006. Competition from foreign markets, however, is intense – 38 percent cited it as a barrier to growth, making it the third-highest concern for industrial manufacturers.

Fifty-eight percent of industrial manufacturers reported higher costs in the third quarter; 42 percent reported that they had increased their prices. Overall, 37 percent saw their gross margins increase, while 17 percent saw them fall. Concern about decreasing profitability over the next 12 months rose to 30 percent.

		Quick Scorecard			2005									2006
						3Q				4Q				1Q				2Q				3Q				Quarterly Movement
		Believe domestic economy is growing				75%				87%				92%				84%				68%				↓
		Optimistic about US economy next 12 months				45				76				67				63				45				↓
		Optimistic about world economy				54				71				77				64				58				↓
		Expect positive revenue growth next 12 months				91				97				92				89				85				←→
		Average % growth expected				7.8				7.7				7.8				8.1				7.3				↓
		Planning major new investments next 12 months				60				57				47				60				47				↓
		New investments as a % of revenue				8.0				9.8				8.4				8.7				6.6				↓
		Planning to add workers next 12 months				52				61				58				58				37				↓
		New workers as a % of workforce (net)				-0.5				+2.0				-1.7				-0.1				+0.3				↑

For more information about Barometer surveys, including recent economic trend data and topical issues, please visit our web site: www.barometersurveys.com. Accompanying charts available upon request.

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	Full Report of Manufacturing Barometer Survey
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	Executive Summary of Manufacturing Barometer Survey
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