NEW YORK, July 29, 2008 —Pessimism and uncertainty about the domestic and world economies reached a five-year high among U.S.-based industrial manufacturers in the second quarter of 2008, according to the PricewaterhouseCoopers LLP Manufacturing Barometer. Ninety-two percent of senior executives surveyed are pessimistic or uncertain about the U.S. economy's prospects over the next year, a four point rise over the prior quarter and a significant jump from 38 percent in the second quarter of 2007. Twenty-seven percent expressed pessimism about the prospects for the world economy in the year ahead, an increase of six points from last quarter and up dramatically from the 2 percent who were pessimistic one year before.

More than two-thirds (77 percent) of industrial manufacturers reported that they believed the domestic economy was declining in the second quarter, while only 3 percent believed it was growing. This is in direct opposition to one year ago, when only 3 percent believed the economy was declining and 69 percent believed it was growing. Looking ahead, only 8 percent are optimistic about the U.S. economy over the next 12 months, and 40 percent remain uncertain. Industrial manufacturers remain more pessimistic about the U.S. economy than an all-industry consensus.

The Barometer found that 68 percent of executives expect positive revenue growth for their own companies over the next year, down 16 points from a year ago, but remaining relatively flat compared to the 70 percent from the prior quarter. Accordingly, revenue targets were reset to 3.7 percent, a 20 percent drop from the 4.6 percent recorded in Q1 and a 35 percent drop from the second quarter of 2007.

International sales in Q2 remained strong for those selling abroad, increasing for 66 percent of respondents, and international sales projections for the upcoming 12 months increased slightly to 38 percent of total revenue, which is three points higher than both the prior quarter and the level seen in the second quarter of 2007. However, of those industrial manufacturers selling abroad, almost two-thirds are either pessimistic (27 percent) or uncertain (36 percent) about the world economy over the next 12 months, a drastic increase from 22 percent a year ago.

“High oil and energy prices, coupled with slackening demand, are taking their toll on U.S. industrial manufacturers," said Barry Misthal, partner and industrial manufacturing sector leader at PricewaterhouseCoopers. “International sales have been a bright spot for U.S. manufacturers, but dropping levels of optimism in the world economy are not a good sign. A faltering global economy would prolong a return to the above-average growth rates these manufacturers have enjoyed during recent years."

With the price of oil reaching $140 per barrel in the second quarter, it's no surprise that 78 percent of executives cited oil/energy prices as a potential barrier to growth over the next 12 months, which is a ten point jump from Q1. Concern about lack of demand was cited by 60 percent of all industrial manufacturers as a barrier to growth, and approximately half cited decreasing profitability and emerging pressure for increased wages, up two points and 20 points, respectively, from the prior quarter. Interestingly, the number of executives citing the monetary exchange rate as a barrier to growth dropped to 40 percent in the second quarter, down 17 points from the prior quarter.

Of the 78 percent of executives feeling the impact of oil/energy prices, more reported higher costs and prices, lower margins in the second quarter, and projected notably lower revenues for the upcoming year than the 22 percent that did not cite oil/energy prices as a big concern. This three-fourths majority projected a growth rate of 1.4 percent for the next 12 months, a stark contrast from their counterparts who are projecting a growth rate eight times higher at 11.1 percent.

The Manufacturing Barometer is one in a series of quarterly business outlook surveys from PricewaterhouseCoopers. The survey provides a view on the 12-month outlook for revenue growth, new investments, new hiring plans, emerging business barriers and more. In addition to the business outlook, we hear from our panelists about special issues they face as the business climate changes.

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