Good Times Just Round the Bend: U.S. Manufacturers Gear Up for Growth

U.S. industrial manufacturers are gearing up for growth, projecting an average revenue increase of 8.1% for the next 12 months, according to PricewaterhouseCoopers’ (New York) most recent Manufacturing Barometer. Executives surveyed also expressed continued worries about energy prices, and 61% noted they were either already sourcing from low-cost countries or seriously considering doing so.

Industrial manufacturers predicted growth rate of 8.1% is higher than last quarter’s projection of 7.8%, and significantly above the 6.5% forecasted a year ago. On another positive note, only 13% of respondents cited decreasing profitability as a potential barrier to growth, down from 22% last quarter.

Pass-through price increases have provided an opportunity for these companies to test their pricing power and maintain gross margins. While costs have increased for over half (53%) of the companies, nearly as many have boosted their prices (45%). At the same time, 40% of those surveyed increased their gross margins. These strong margins are enabling the majority of manufacturers (60%) to make major new capital investments over the next year, with 57% planning increased investment in new products or services, and 49 and 47%, respectively, expecting to make added investments in information technology and research and development.

“Industrial manufacturers are responding to the challenges of increased costs in a healthy way,” said Jorge Milo, leader of PricewaterhouseCoopers' U.S. industrial manufacturing practice, “ensuring their—and the market’s—continued growth and success”

He added that if these companies can continue to effectively deal with increased energy costs, the industry should continue to experience positive growth.

Energy prices are the driving force behind rising costs, with 65% of executives viewing them as a barrier to growth. This represents a slight increase over the 63% who named higher energy costs as a barrier to growth last quarter; however, it is far fewer than the 80% who saw it as a concern last year.

The Manufacturing Barometer also found that 61% of manufacturers are either using or considering using low-cost sourcing from abroad to reduce supply chain and sourcing expenses. Those who are either using or considering low-cost sourcing tended to be larger companies, with enterprise revenues averaging $7 billion (versus $4.3 billion for those not using or considering low-cost sourcing).

Additionally, users or those considering low-cost sourcing expected slower revenue growth over the next year—7.7%. Companies not using or considering low-cost sourcing projected revenue growth of 10.4%. Users or those considering low-cost sourcing appear to have less price flexibility and expect a greater share of their total revenues to come from sales abroad.

“Competition is tight across the globe,” said Milo. “Industrial manufacturers looking to control rising costs often need to rely on low-cost country sourcing in order to maximize international supply chain efficiency.”

China was the leading country cited for low-cost sourcing, with 82% of those using or considering low-cost sourcing likely to set up operations here. Following China were India (50%), Mexico (42%) and Eastern Europe (32%). China and India lead the way as likely destinations (both with 16%) among companies seriously considering low-cost sourcing overseas in the near future.

On the hiring front, 58% of industrial manufacturers plan to expand their workforce over the next 12 months, an increase over the 43% who expected to hire more employees a year ago. However, overall composite hiring for the industry remains flat at -0.1%, likely due to cutbacks at large firms.

Industrial manufacturing executives expressed optimism about the global and domestic economies, with 63% reporting optimism about the U.S. economy, and 64% about the global economy.

The following findings from PricewaterhouseCoopers' Manufacturing Barometer, a quarterly survey, are based on interviews with 62 senior executives of large, U.S. industrial manufacturers about the business climate. This release summarizes results for Q2 of 2006, from interviews conducted through July 12, 2006.

PricewaterhouseCoopers' "Manufacturing Barometer" is developed and compiled with assistance from the opinion and economic research firm of BSI Global Research, Inc.

Source: Manufacturing Barometer. Executives Surveys

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