2Q 2008 Manufacturing Barometer: Pessimism and Uncertainty About U.S. and World Economies Reaches Five-Year High Among U.S. Industrial Manufacturers

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In 2Q 2008, PricewaterhouseCoopers interviewed 60 USbasedindustrial manufacturing executives about their currentbusiness performance, the state of the economy, and theirexpectations for business growth over the next 12 months.We then compared their responses with the prior quarter'sresults to see how the panel's 12-month outlook changed.The final step was to compare their views with a wider panelto show how the industry differs from the broader population.Overall, US-based industrial manufacturers are continuing toadjust to a slower-paced domestic economy. The drain ofhigher oil/energy costs is becoming more difficult to offset andwill continue to be a challenge as it spreads across thegeneral supplier and customer base in the second half of2008. The strength of international sales will be of increasingimportance.Key findings:

• The majority are pessimistic about the US economy.
  Ninety-two percent of senior executives surveyed are eitherpessimistic (52 percent) or uncertain (40 percent) about theUS economy's prospects over the next year. Only 8 percentare optimistic the US economy will grow. Among thosemarketing abroad, 37 percent are optimistic the worldeconomy will grow. Those who have a pessimistic outlookabout the world economy rose to 27 percent, anduncertainty rules the remainder.
• International sales climb.
  Of those marketing abroad, 66percent reported an increase in international sales, and only4 percent reported a decrease. Over the next 12 months,international sales are projected to be 38 percent of totalrevenue, three points higher than in 1Q 2008.
• Growth looks positive but slow.
  Own-company 12-monthrevenue growth projections dipped, from 4.6 percent in 1Q2008 to 3.7 percent in 2Q 2008, a 20 percent drop. Mostbelieve revenue will grow, with 18 percent expectingdouble-digit growth and 50 percent single-digit growth. Fewexpect negative growth (5 percent).
• Oil/energy prices are a drag.
  More than three-fourths (78percent) view oil/energy prices as the leading potentialbarrier to own-company growth over the next 12 months –up 10 points to a new high for the survey. This oil/energyvulnerable segment projects a 1.4 percent rate of revenuegrowth over the next 12 months versus 11.1 percentprojected by those who say they are not oil/energyvulnerable. Fifty-three percent of the oil/energy vulnerableview profitability as a potential barrier to growth over thenext 12 months, indicative of a harmful profit-squeeze.Costs were higher for 83 percent of this segment, prices upfor 60 percent, and gross margins were tighter in 2Q 2008.
• Other barriers emerged.
  Three other strong headwindswere cited by 50 percent or more of industrialmanufacturers: concern about lack of demand; decreasingprofitability; and pressure to increase wages.
• Investments, M&A plans steady.
  Despite the difficulttimes, plans for major new investments of capital arecontinuing. Half are planning new investments, but the rateof investment is a lower mean at 5.4 percent of sales.Operational spending increases also are in line with theprior quarter, with an important focus on new product orservice introductions, research and development andgeographic expansion. M&A activity plans also held upquarter-to-quarter.
• Overall, quarterly gross margins turned negative.
  Pricing is chasing higher costs but continues to fall behindfor many industrial manufacturers. Gross margins were upfor 18 percent but down for 43 percent for a net negative 25percent. Costs were higher for more firms: 80 percentreported costs were up, 7 percent down, for a net 73percent with higher costs. Yet fewer raised prices: 55percent reported prices were up, 13 percent down, for a netof 42 percent.
• Few workforce additions are planned.
  In line with 1Q2008, 32 percent plan net new hiring, and only 17 percentexpect to reduce their workforces. Composite new hiring isflat, averaging a plus 0.1 percent.