PricewaterhouseCoopers: Economic Optimism in Decline

NEW YORK, N.Y.—Less than half (45 percent) of U.S. industrial manufacturers are optimistic about the U.S. economy over the next 12 months, down from 63 percent last quarter and 76 percent in the fourth quarter of 2005, according to PricewaterhouseCoopers’ recent Manufacturing Barometer. Forty-eight percent view lack of demand as a barrier to growth, equal with oil and energy prices; however, most expect oil prices to level off over the next year.

“This shift in confidence among industrial manufacturers is the result of continued high energy prices, which affects not only the bottom line but also demand,” said Barry Misthal, a partner in PricewaterhouseCoopers’ industrial products practice.

Those surveyed expected energy costs to even out over the next 12 months. Twenty-eight percent predict a further rise in energy costs, while 22 percent think they will fall. This is a significant change from the first quarter of 2006, when 63 percent expected energy prices to rise.

A majority of companies (60 percent) are passing along at least some of their increased energy costs to customers. Despite these pass-through efforts, 53 percent of industrial manufacturers reported a negative impact on their profit margins over the past 12 months due to higher energy costs.

Economic uncertainty was evident in industrial manufacturers’ plans for the coming year. Only 47 percent of those surveyed were planning major new investments in this timeframe (compared to 60 percent last quarter), and only 37 percent were planning to add new workers (down from 58 percent last quarter). Sixty-eight percent now believe the domestic economy is growing, compared with 84 percent who believed growth was on the horizon last quarter. However, 85 percent still expected to gain positive revenue growth at an average of 7.3 percent, off slightly from 8.1 percent last quarter.

Executives surveyed were more optimistic about the global economy than the domestic economy. Fifty-eight percent were optimistic about the global economy, falling from a recent high of 77 percent in the first quarter of 2006. Competition from foreign markets, however, is intense—38 percent cited it as a barrier to growth, making it the third-highest concern for industrial manufacturers.

Fifty-eight percent of industrial manufacturers reported higher costs in the third quarter and 42 percent reported that they had increased their prices. Overall, 37 percent saw their gross margins increase, while 17 percent saw them fall. Concern about decreasing profitability over the next 12 months rose to 30 percent.

For more information about Barometer surveys, visit www.barometersurveys.com.