Manufacturers Turn Cautious on Global Economic Outlook

Manufacturers Turn Cautious on Global Economic Outlook

Many years ago I read a book about the stock market. It poked fun at the news reports that would go—there is a wave of selling. Hmm, for every seller there is a buyer. Someone bought all the shares being sold.

I bring that up just as a note about economics (and maybe life in general). Some things are good and bad simultaneously.

Take the strength of the dollar. American nationalists think that a strong dollar means a strong nation, or that we “won” some contest. However, for manufacturers and other suppliers looking to sell overseas a strong dollar makes our products more expensive and therefore less competitive.

The latest PwC US Manufacturing Barometer just came my way. It states, “Sentiment regarding the direction of the global economy took a sharp turn downward among U.S. industrial manufacturers, according to the Q3 2015 Manufacturing Barometer, released by PwC US today.  Global concerns also served to moderate optimism regarding the domestic outlook, while slowing plans to hire more workers.  At the same time, capital and operational spending forecasts among U.S. companies remained healthy.”

Details:

During the third quarter of 2015, optimism regarding the direction of the global economy dropped to 23 percent from 38 percent in the previous quarter and 30 percent in the third quarter of 2014.  In addition, pessimism rose to an equal level with optimism (23 percent), reflecting an uncertain outlook for international commerce.  Further, 40 percent of respondents indicated they believed the world economy was declining, showing greater concern than in the previous quarter (25% in Q2).

Conversely, optimism regarding the U.S. economic outlook remained positive but dropped to 60 percent in the third quarter of 2015 from 69 percent in the second quarter.  Despite the renewed sense of caution regarding the global stage, company revenue forecasts for the next 12 months rose to a moderately high 5.3 percent in the third quarter, compared to a forecast of 4.9 percent in the second quarter.

“U.S. industrial manufacturers became increasingly cautious on the outlook for the global environment as they assessed the impact of the slowdown in China and the strengthening dollar,” said Bobby Bono, PwC’s U.S. industrial manufacturing leader.  “Despite the downward turn in overseas sentiment, overall domestic growth prospects remained healthy and manufacturers continue to focus on further strengthening core products and services.  They are keeping their cash at home and directing investment toward enhancing their value propositions in an effort to remain competitive and drive future revenues.”

As a result of the decline in global sentiment, U.S. industrial manufacturers scaled back hiring plans in the third quarter, with only 37 percent planning to add employees to their workforce over the next 12 months, down 15 points from the 52 percent level indicated in both the second-quarter and year ago comparable period.  The total net workforce growth projection in the third quarter was minus 0.2 percent, indicating further cutbacks in hiring among industrial manufacturing firms.

Among the minority of panelists planning to hire within the next 12 months, the most sought-after employees will be blue collar/skilled labor (23 percent) and professionals/technicians (25 percent). Limited white collar support, middle management and sales/marketing hiring is planned.  “The drop in hiring plans may indicate an expectation for slower growth in the near future,” Bono added.  “Management teams will likely intensify avenues to improve productivity across their organizations, while continuing to search for professionals with strong technical skills.”

Despite the tempered global outlook, 37 percent of U.S. industrial manufacturers surveyed plan major new investments of capital during the next 12 months, up slightly from the second quarter and same period last year.  In addition, the mean investment as a percentage of total sales was a moderately high 5.6 percent, well above 3.3 percent in the second quarter and on par with 5.7 percent in last year’s third quarter.  Operational spending plans remained healthy as well with 82 percent indicating plans to increase operational spending, up from 75 percent in the second quarter and 69 percent last year.  Leading increased expenditures were new product or service introductions (48 percent), research and development (37 percent), business acquisitions (23 percent) and information technology (22 percent).

“In the face of global uncertainty and the impact of a strengthening U.S. currency, management teams continue to focus investment on developing new products and driving innovation in an effort to sustain and build market share,” Bono added.  “Companies are doubling down on what they do best and aggressively building their competitive moats.  At the same time, they are continuing to pull back from overseas expansion, with only five percent indicating plans to open facilities abroad.”

Looking at perceived barriers to entry, monetary exchange rate became the leading headwind to growth over the next 12 months, as indicated by 38 percent of respondents.  A year ago, it was only 14 percent (24 points lower).  Typical barriers to growth—lack of demand (32 percent) and legislative/regulatory pressures (25 percent)—were lower as monetary exchange rate took center stage.

PwC also surveyed respondents on investment in information technology, and found that 80 percent of manufacturers report having a multiyear plan (3-5 years) that addresses business capabilities and processes as well as IT systems.   Industrial manufacturing companies’ IT investments are made primarily to reduce costs (84 percent) and support growth (72 percent).  Overall, 90 percent are planning to invest in IT technologies over the next 12-18 months, with upgrading infrastructure the leader at 82 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 Q3 2015 and was conducted from June 24, 2015 to September 28, 2015.

Optimism for Domestic Economic Outlook among U.S. Industrial Manufacturers at Highest Level in Five Quarters

PwC Industrial Manufacturing Leader

PwC Bobby Bono

Optimism among U.S. industrial manufacturers regarding the domestic economic outlook rose to 63 percent during the second quarter of 2013, up from 55 percent in the first quarter and representing the highest level since the first quarter of 2012, according to the Q2 2013 Manufacturing Barometer, released today by PwC US. In addition, 72 percent of respondents believed the U.S. economy grew in the second quarter, up 10 points from the prior quarter. At the same time, sentiment pertaining to the world economy remains guarded with only 31 percent expressing optimism and 59 percent voicing continued uncertainty.

The spread between those optimistic about the domestic economy versus those optimistic about the global economy over the next 12 months was 32 percent, representing the second highest quarterly total since these questions were first asked in the third quarter 2003 survey. At the same time, PwC’s Global Manufacturing Current Assessment and Outlook indices show a reduction in overall pessimism among manufacturing executives compared to the first quarter, which appears to be driven by more bullishness over total sales, driven by the U.S., offsetting in part increasing bearishness over international sales.

Views on US and World diverge

“There remains a persistent dichotomy in viewpoints regarding the outlooks for the U.S. and world economies. Optimism regarding the domestic economy has increased, while worldwide economic sentiment remains restrained, with global uncertainty reaching the highest level in the past 12 months,” said Bobby Bono, U.S. industrial manufacturing leader for PwC. “The U.S. is starting to show signs of healthy demand trends and improving pricing power, supporting positive overall sentiment in the year ahead. However, as a result of the mixed global outlook, combined with the moderate domestic recovery and the specter of increased legislative and regulatory pressures, management teams are continuing to carefully manage their costs, while maintaining a focus on growing profitably.”

Reflecting the healthy level of optimism pertaining to the domestic economy, 82 percent of industrial manufacturers surveyed expect positive revenue growth for their own companies in the next 12 months, with only three percent forecasting negative growth. The projected average revenue growth rate over the next 12 months was 4.6 percent, up from 4.3 percent in the first quarter, but down from 5.6 percent in last year’s second quarter. Despite the reduced rate of forecasted growth, the outlook for the U.S. continues to contrast with the international picture, where optimism regarding commerce in the next 12 months was only 31 percent, compared to 36 percent in the first quarter. In addition, the projected contribution of international sales to total revenue over the next 12 months remained low at 32 percent, consistent with the first quarter survey, but down from 37 percent in the second quarter of last year.

With regard to capital spending, 40 percent of respondents plan major new investments during the next 12 months, off three points from 43 percent in the first quarter, but well below the 55 percent recorded in the second quarter of 2012. The mean investment as a percentage of total sales of four percent was also lower than the prior quarter’s 4.8 percent, indicative of moderate spending among respondents, and reflecting in part a reduction in planned spending increases from the peak post-recessionary period, which benefitted from pent-up demand.

Operational spending to grow

Plans for operational spending also remained notably below prior year levels. Looking at the next 12 months, 73 percent of respondents plan to increase operational spending, similar to 71 percent in the first quarter, but down from 87 percent in the second quarter of last year. Leading increased expenditures were new product or service introductions (45 percent) and research and development (38 percent). Plans for geographic expansion remained low at 15 percent, up from 10 percent in the first quarter, but down significantly from 33 percent last year.

“Sustained global uncertainty has likely led the way in fostering a more measured approach to capital spending, in conjunction with a return to more normalized spending patterns commensurate with the current stage of the post-recession cycle,” continued Bono. “We are also continuing to see little enthusiasm for overseas expansion, while management teams target spending primarily on R&D, new product launches and IT. This suggests they are focusing inward on innovation and leveraging their core strengths in a competitive domestic environment.”

According to the latest survey, 42 percent of industrial manufacturers plan to add employees to their workforce over the next 12 months, off three points from the first quarter. Only five percent plan to reduce the number of fulltime equivalent employees, and 53 percent will stay about the same. The net workforce projection stayed at plus 0.9 percent, similar to last quarter’s plus one percent, indicating some new hiring continuity among several of these industrial manufacturing companies. The most sought-after employees will be production workers (23 percent), skilled labor (23 percent) and professionals/technicians (18 percent).

Similar to levels recorded in the first quarter, second quarter survey respondents highlighted legislative/regulatory pressures (53 percent) and lack of demand (47 percent) as the biggest barriers for growth over the next 12 months. Oil/energy prices were viewed by 22 percent as a barrier to growth, a significant drop from 35 percent in the first quarter and 48 percent in last year’s second quarter.

“We’re seeing a significant moderation in concerns regarding energy costs among industrial manufacturers, consistent with other recent PwC studies. It appears that the increase in shale oil and gas production domestically is having a positive effect on energy costs and is now impacting strategic planning among some industrial manufacturers. This is a welcome development for management teams given the moderately growing economy and the continued emphasis on controlling costs,” added Bono.

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