Yet, despite this increase in optimism, slower growth is expected. Growth projections for the next 12 months dropped from 7.3 percent in the prior quarter to 6.2 percent, a fifteen percent drop-off. This is the lowest projected growth reported since the first quarter of 2004.
Planned major new investments as a percent of revenue over the next 12 months remained steady at 6.5 percent, in line with the prior quarter's 6.6 percent. However, this is down significantly from the year earlier level of 9.8 percent.
Hiring plans showed a continued downturn in those planning to add new workers. A year ago, 61 percent expected to increase their workforce over the coming year. This past quarter, only 33 percent plan to do so. Those planning to decrease their workforce have risen slightly to 12 percent from 7 percent over that same time period.
“Optimism in the sector peaked during the fourth quarter of 2005 as manufacturers planned major new investments and increases in their workforce,” said Barry Misthal, PricewaterhouseCoopers' Industrial Manufacturing sector leader. “Optimism waned throughout 2006, bottoming out in the third quarter, most likely a result of continued high energy costs. Executives' optimism bounced back this most recent quarter, but with moderated growth projections. The biggest challenge for them now is creating sustainable businesses that will prosper long-term.”
Concern around demand remained a negative factor, although it fell off to 39 percent from 48 percent in the prior quarter. And, despite lower oil prices in recent months, oil/energy prices remained the leading potential barrier to growth over the next 12 months, rising from 48 percent to 62 percent of manufacturers, in line with the first half of 2006. Two additional potential barriers were revealed in the fourth quarter of 2006 – concern about legislative/regulatory pressures rose from 25 percent to 34 percent and new anxieties about taxation policies rose from a low eight percent to 20 percent this quarter.
Increased investments are planned for over the next 12 months in a wide range of areas, led by new product/service introductions (43 percent), geographic (43 percent) and facilities expansion (41 percent), IT (39 percent) and business acquisitions (34 percent).
On a quarterly basis, fewer firms reported cost increases in the fourth quarter of 2006, and fewer reported price increases. Gross margins were directionally downward for the quarter (26 percent stated they were up, while 34 percent stated they were down). Looking out over the next 12 months, however, only 21 percent cited decreased profitability as a potential barrier to company growth (off nine points from the prior quarter).
“Industrial manufacturers expect a slowdown over the next 12 months, more of a soft landing, and they have moderated their plans for new hiring and levels of new capital spending. While wary about oil/energy costs, demand, new legislation/regulatory pressures and tax policies, they do not anticipate a sharp economic downturn in the U.S. or world economies,” said Misthal.
Strategies to Reduce or Eliminate Supply Chain Risks
This quarter the Barometer probed executives on their strategies to reduce or eliminate supply chain risks. Responses show that most large manufacturers have built-in redundancy plans for their IT Networks (79 percent), and another two percent plan to implement this strategy over the next 12-18 months. Only 11 percent have no plans to do so, and eight percent were uncertain or not reported.
Redundant sourcing of critical parts is being addressed by 69 percent (64 percent already implemented and 5 percent planning). A similar proportion, 64 percent, has addressed creation of backup plans in the case of natural disaster, terrorist attack or other hostile geopolitical activity (54 percent implemented, 10 percent with plans). A majority (60 percent) has also addressed formalized tracking of the “health” of suppliers, co-manufacturers, and sub-assembly makers. However, the strategy of built-in redundancy for transportation logistics has only been addressed by 43 percent.
The full Manufacturing Barometer report is available at www.pwc.com/mb.
PricewaterhouseCoopers’ Manufacturing Barometer is a quarterly survey of executives in large, U.S.-based industrial manufacturing companies that measures opinions on subjects ranging from the domestic economy, barriers to growth, margins and pricing, new investment strategies, hiring plans and business initiatives under consideration. It is developed and compiled with assistance from the opinion and economic research firm of BSI Global Research, Inc.
If you have a question about this Manufacturing Barometer survey, please contact Jim Clayman, Industrial Products marketing director, at 636-405-1672, or e-mail to: jim.clayman@us.pwc.com.
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries work collaboratively using connected thinking to develop fresh perspectives and practical advice.
"PricewaterhouseCoopers" refers the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
PricewaterhouseCoopers' Industrial Products practice is a global network of over 1,000 partners and 17,000 client service professionals who provide industry-focused assurance, tax and advisory services to over 1,000 public and private companies in the aerospace & defense, chemicals, forest & paper, industrial machinery, and metals sectors.
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