Economic Optimism Surges for Industrial Manufacturing Sector

U.S. manufacturing executives forecast increases in economic growth, new investments and hiring in the next 12 months, according to the Q2 2004 PricewaterhouseCoopers Manufacturing Barometer survey. Ninety-four percent of industrial manufacturing executives reported that the U.S. economy grew in the second quarter. Looking ahead, 84 percent of manufacturers were optimistic about the economy’s prospects over the next 12 months, up from 79 percent in the prior quarter. However, barriers to growth, including foreign market competition, monetary exchange rates and lack of qualified workers, remain a concern.

The barometer also compares the views between the manufacturing industry and a cross-section of other business sectors. In past barometers, the manufacturing industry trailed the general consensus in most areas. But manufacturers turned markedly more upbeat in the second quarter, matching the consensus economic outlook for all large businesses. Manufacturers, however, are forecasting more conservative plans for new revenue growth and hiring.

Additional highlights from the Q2 2004 Manufacturing Barometer include:

• Top-line revenue growth targets for the next 12 months were readjusted upward, from 6.0 percent to 7.7 percent, but still shy of the all-industry consensus of 9.5 percent.

• New hiring plans showed a strong net gain — a majority, 52 percent, expects to add workers over the next 12 months. Analysis by worker categories shows the most interest in hiring production workers and technicians over the next 12 months.

• Companies planning major new investments over the next 12 months increased from 46 percent to 52 percent, but continue to slightly lag the consensus of 55 percent. However, 53 percent of manufacturers expect to increase budgets for new product or service introductions and 36 percent for research and development. These are better than the consensus levels of 47 percent and 26 percent respectively.

• Optimism about the world economy also increased sharply, from 65 percent in the prior quarter to 73 percent, surpassing the all-industry consensus of 69 percent.

• Net margins for manufacturers were close to the consensus level, as were costs. Prices were increased by 44 percent of industrial manufacturers, but lowered by 12 percent, for a net of plus 32 percent – better performance than the all-industry benchmark of plus 28 percent.

“Industrial manufacturers have clearly become more upbeat on revenue growth, new hiring and economic optimism,” said Jorge Milo, U.S. leader of PricewaterhouseCoopers LLP’s industrial manufacturing practice. “In this environment of growth with underlying concerns about inflation, it is a very positive sign that manufacturers are in the forefront with their pricing power.”

Despite this optimism, the Manufacturing Barometer does cite some barriers to growth that will be monitored closely in the upcoming quarters. Thirty-eight percent of manufacturers view foreign market competition as a potential barrier to growth and 30 percent think monetary exchange rates will be as well. In addition, there is a potential drawback from the increase in hiring plans. Twenty-five percent of manufacturers forecast a lack of qualified workers as a hurdle for growth over the next 12 months.

In the second quarter, PricewaterhouseCoopers’ Manufacturing Barometer interviewed 163 senior executives about the business climate, including 77 in large, multinational industrial manufacturing companies, and 86 of their peers in a cross-section of all other business sectors. The full report is available at www.pwc.com/mb.

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