International outlook dims; Global sentiment at lowest in eight quarters
Concerns regarding legislative/regulatory and taxation pressures on the rise
NEW YORK, October 7, 2014 — Optimism regarding projected company revenue growth increased among U.S. industrial manufacturers during the third quarter of 2014, according to the Q3 2014 Manufacturing Barometer, released today by PwC US. Survey respondents forecast an average growth rate of 5.6 percent over the next 12 months, up from 5.2 percent in the second quarter and 4.2 percent a year ago. The positive revenue outlook ran counter to a notable softening in sentiment regarding the future direction of the U.S. and global economies overall, coupled with increased concerns about the potential impacts of legislative/regulatory and tax policies.
Optimism regarding the prospects of the U.S. economy during the next 12 months dropped among U.S. industrial manufacturers to 57 percent during the third quarter of 2014, compared to 65 percent in the previous quarter and 60 percent in the third quarter of 2013. While the indicator remained solidly in positive territory, it represented the lowest level in the past six quarters. At the same time, optimism about the world economy dropped to 30 percent, down from 38 percent in the second quarter — a modest reading that was the lowest in eight quarters.
“The projected revenue growth rate among industrial manufacturing companies rose during the third quarter, indicating increased levels of confidence in company fundamentals and competitive positioning,” said Bobby Bono, PwC’s U.S. industrial manufacturing leader. “The improved outlook for company performance ran counter to a decline in sentiment regarding the direction of the economic environment, particularly on the international stage. At the same time, we saw a notable uptick in caution regarding the potential impacts of legislative/regulatory and taxation policies. This tells us management teams believe they are making the right decisions to grow, but remain leery of external factors beyond their control, resulting in some abatement in the level of near-term spending and investment plans.”
Among the major findings of the survey, 59 percent of respondents singled out legislative/regulatory pressures as the major headwind to growth over the next 12 months, up from 47 last quarter and 58 percent in the third quarter of 2013. This was followed by lack of demand, which was cited by 43 percent of respondents, in line with 42 percent during the second quarter and down slightly from 45 percent last year. In addition, concerns regarding taxation policy jumped to 31 percent of respondents, compared to 25 percent in the second quarter and 22 percent last year.
“As the year progresses, we’ve seen an elevation of geopolitical concerns across the world, which is adding complexity to management decision-making,” Bono continued. “Despite notable growth thus far for the industrial manufacturing industry and many bright spots regarding company performance, we believe management teams are taking a more conservative approach to cash outlays as they assess recent events and seek to gauge the direction of the global economy. However, balance sheets remain strong across the sector, boding well for future investment activity as the macro-environment becomes clearer.”
The decreased sentiment regarding the economic outlook overall coincided with a moderation in plans for new investments of capital, with 36 percent of respondents indicating increased outlays in the next 12 months, down from 52 percent in the previous quarter and 48 percent in the third quarter last year. However, the mean investment as a percentage of sales remained at 5.7 percent, identical to the previous quarter. Operational spending plans also declined with 69 percent of respondents indicating increased short-term spending in the next 12 months, down from 75 percent in the second quarter, and 78 percent in the third quarter of 2013. Plans for spending on research and development declined t0 36 percent, from 45 percent in the second quarter of 2014, while plans for new product or service introductions remained at 43 percent, level with the second quarter.
Most other spending categories showed quarter-over-quarter declines, with plans for investing in business acquisitions recording a considerable drop compared to the previous quarter but in line with prior year levels. Consistent with this finding, the Q3 Manufacturing Barometer also indicated a considerable decrease in plans for M&A spending. Twenty-six percent of respondents planned M&A activity in the year ahead, compared to 38 percent in the second quarter, but up from 22 percent in the third quarter of 2013. The majority of that group is focused on purchasing another business, followed by the sale of part/all of their own business or a spin-off.
Despite decreased spending plans, sentiment regarding hiring remained steady in the Q3 Manufacturing Barometer, with 52 percent of U.S. industrial manufacturers indicating plans to add employees to their workforce over the next 12 months. Consistent with the previous quarter, the most sought-after employees will be skilled labor (33 percent), followed by production workers (26 percent) and professionals/technicians (26 percent). Plans to hire white collar support ticked up modestly to 10 percent in the third quarter from eight percent in the second quarter, but remained well below the 17 percent level recorded in the third quarter of 2013.
Special Topic: Triggers to Growth
The latest Manufacturing Barometer revealed that the top potential trigger of increased investment and growth for respondents’ own companies over the next few years was lower costs of raw materials, cited by 51 percent of respondents as a major trigger. The second most important trigger to growth was listed as new products or service innovations, cited by 43 percent of respondents. Market expansion in the U.S. and less government regulations in industry were also cited as major growth triggers by one-in-four of industrial manufacturers.
Increased availability of capital to middle-sized businesses also came through as a growth trigger, cited by 25 percent of respondents. Market expansion abroad was cited as a major growth trigger by 19 percent, followed by costs of energy reduced (13 percent), and strategic alliances or joint ventures (11 percent).
About the Manufacturing Barometer
PwC's Manufacturing Barometer is a quarterly survey based on interviews with 60 senior executives of large, multinational U.S. industrial manufacturing companies about their current business performance, the state of the economy and their expectations for growth over the next 12 months. This survey summarizes the results for Q2 2014 and was conducted from April 3, 2014 to June 27, 2014. To view the complete Manufacturing Barometer report, visit http://www.pwc.com/manufacturing-barometer. For information about other Barometer surveys, including recent economic trend data and topical issues, visit http://www.barometersurveys.com.
About PwC’s Industrial Products practice
PwC’s Industrial Products (IP) practice provides financial, operational, and strategic services to global organizations across the aerospace & defense (A&D), business services, chemicals, engineering & construction (E&C), forest, paper, & packaging (FPP), industrial manufacturing, metals, and transportation & logistics (T&L) industries. With more than 31,000 professionals located in over 150 countries, PwC’s IP global professionals deliver a wide range of industry-focused tax, assurance, and advisory services to address critical business issues. For more information please visit: www.pwc.com/us/en/industrial-products
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