Slowing of U.S. Economy Leads to Decrease in Domestic Optimism, Says PricewaterhouseCoopers

NEW YORK, N.Y.—More than eight in 10 (83 percent) of industrial manufacturers are optimistic about the global economy over the next 12 months, according to PricewaterhouseCoopers’ Manufacturing Barometer, a quarterly survey of U.S. industrial manufacturing executives. Yet, continued softening of the U.S. economy led to a drop in optimism among executives, down seven percentage points from the previous quarter, with 57 percent of executives expressing optimism about the domestic economy.

While 69 percent of executives believe the domestic economy is growing, this is down from the reported 92 percent in the first quarter of 2006. However, only five percent of manufacturers were reported as being pessimistic about the current U.S. economy.

“Despite their concerns over the domestic economy, the outlook is not so bleak for the industrial manufacturing industry,” said Barry Misthal, PricewaterhouseCoopers’ Industrial Manufacturing sector leader. “Higher levels of optimism about the world economy were reported among senior executives, supported by increased international sales and an expected increase in geographical expansion, including new markets.”

International markets continue to serve as a pillar of strength for the 90 percent of industrial manufacturers selling abroad. In the first quarter of 2007, over half (59 percent) of executives are increasing their international sales and are expecting 33.9 percent of their total revenues to come from abroad.

Additionally, 56 percent of executives cited plans for major new investments of capital over the next 12 months, with the level of planned investments rising to 7.4 percent of revenues compared to 6.5 percent in the previous quarter. Nearly half (44 percent) of all industrial manufacturers are investing in geographic and facilities expansion. Complementing the strong view of the world economy, 39 percent of manufacturers are considering expansion into new markets abroad, a six-point increase quarter-to-quarter.

Survey respondents also expect to increase hiring for 2007, with 46 percent planning to add net employees to their workforce over the next 12 months. This is a 13-point rise from the previous quarter, when only 33 percent of manufacturers planned to add workers.

Despite the increase in hiring plans and major new investments, a slower growth rate is projected for the year-end of 2007 in the manufacturing industry, off notably from an average of 4.4 percent in the prior quarter to 3.1 percent. In addition, own-company revenue projections for 2007 over 2006 fell from 6.5 percent in the prior quarter to 5.5 percent in the first quarter.

“Executives are seeing a slowdown in their rate of growth and revenue projections for 2007 compared to 2006,” said Misthal. “However, this will turn slightly upward over the next 12 months through Q1 2008, although with a continued concern about oil and energy costs.”

Concern over oil and energy prices remained the leading barrier to growth for the next year, though dropping eleven points from 62 percent in the fourth quarter to 51 percent this quarter. The lack of demand also remained a negative factor cited by 36 percent of executives along with a concern over legislation or regulatory pressures (also 36 percent).

Coinciding with new hiring plans and expansion into new markets, 41 percent of industrial manufacturers expressed concern over the lack of qualified workers and 39 percent were concerned about competition from foreign markets.

There were also more cost and price increases during the first quarter of 2007. Fifty-one percent of industrial manufacturers cited cost increases and 39 percent raised their prices. Looking out over the upcoming year, only 21 percent considered decreased profitability as a potential barrier to company growth.

“Overall, this quarter’s data seems to support that notion that the world economy is not anticipated to turn down, while the U.S. economy stays soft,” said Misthal.

For access to the complete Manufacturing Barometer, visit www.pwc.com/mb

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