1Q 2008 Manufacturing Barometer: Economic Optimism Plummets among US Industrial Manufacturers

In 1Q 2008, PricewaterhouseCoopers interviewed 60 US-basedindustrial 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 to the prior quarter'sresults to see how the panel's 12-month outlook changed.The final step was to compare their views to a wider panel toshow how the industry differs from the broader population.Of those surveyed, the majority of US-based industrialmanufacturers said they are pessimistic about the prospectsfor the US economy over the next 12 months, and most of theothers said they are uncertain. Only 12 percent remainoptimistic. Their overall uncertainty now includes the worldeconomy where 21 percent say they are pessimistic and 41percent say they are uncertain about the next 12 months.Overall, US-based industrial manufacturers will be readjustingto a slower-paced domestic economy for most of 2008, butwith the continued strength of international sales, an uptick isanticipated as they move into the first months of 2009.
 Key findings:
  • Optimism drops dramatically.
    Those optimistic about the12-month outlook for the US economy fell to a low of 12percent, off 17 points from its 29 percent low in the priorquarter. The majority is now pessimistic (52 percent) aboutthe US economy, and 36 percent remain uncertain. Farfewer are optimistic about the prospects for the worldeconomy this quarter, dropping from 64 percent the priorquarter to 38 percent in 1Q 2008.
  • Revenue projections are lowered.
    Own-company revenueprojections remain positive for 70 percent (off 11 points).However, in the face of growing pessimism, seniorexecutives of US-based industrial manufacturers have resettheir targets, lowering them, on average, nearly a full pointfrom 5.4 percent in the prior quarter to 4.6 percent. Largelyresponsible for these lowered projections, the oil/energyvulnerablesegment plans a 3.9 percent revenue growthrate vs. 6.1 percent for its non-vulnerable peers, or 36percent lower.
  • International sales remain brisk for those selling abroad.
    In1Q 2008, 63 percent of international marketers reportedincreased sales abroad, and 37 percent reported about thesame. Looking ahead over the next 12 months, thecontribution of international sales to total revenues projectsto 35 percent.
  • Fewer new workforce additions are expected.
    Overall,fewer companies plan to add employees over the next 12months, a drop from 36 percent the prior quarter to 32percent in 1Q 2008. Conversely, 15 percent expect areduction in workers, which is similar to the prior fourquarters. The net workforce projection is a negative 0.3percent, below last quarter’s plus 0.1 percent and lastyear's plus 0.7 percent.
  • Investments are up, but M&A plans cool.
    Currently, 52percent plan major new investments of capital, up from 41percent last quarter. Two types of increased expenditurescontinue to lead the way: information technology (40percent) and new product or service introductions (38percent). M&A plans are off from the prior quarter, 37percent vs. 44 percent, respectively.
  • Gross margins show strain.
    Gross margins became anissue for industrial manufacturers in 1Q 2008, turningdirectionally net negative: 23 percent up, 35 percent down –or net minus 12 percent (vs. plus 14 percent in the priorquarter). Both costs and prices were higher in 1Q 2008.
  • Growth concerns emerge.
    Potential barriers to companygrowth over the next 12 months were again led byoil/energy prices and market demand. On the monetaryside, concern about decreasing profitability and monetaryexchange rates were on the rise, while capital constraintsalso began to emerge. The profitability issue must becarefully monitored in 2008, as higher prices may havelimits in chasing higher costs.