Concerns about the slowdown in China and the strong dollar resulted in weakening optimism about the strength of the global economy among U.S. industrial manufacturers in the third quarter of 2015. Optimism fell to 23 percent from 38 percent in the previous quarter and 30 percent in the third quarter of 2014, according to a survey of U.S. industrial manufacturers, released by PwC US.
PwC’s Q3 2015 Manufacturing Barometer also finds that pessimism rose to the same level with optimism at 23 percent, which reflects an uncertain outlook for international commerce, said PwC. Forty percent of respondents also believe the world economy was declining, up from 25 percent in the second quarter.
However, optimism regarding the U.S. economic outlook was positive but dropped to 60 percent in the third quarter of 2015 from 69 percent in the second quarter. Despite growing concern about the global economy, company revenue forecasts for the next 12 months rose to 5.3 percent in the third quarter, compared to a forecast of 4.9 percent in the second quarter.
Of the 60 industrial manufacturers surveyed, 73 percent expect positive revenue growth with 10 percent forecasting double-digit growth and 63 percent forecasting single-digit growth. Seven percent expect flat growth and eight percent forecast negative growth.
"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, in a statement. "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."
Due to the current global outlook, U.S. industrial manufacturers scaled back hiring plans in the third quarter, said PwC, with only 37 percent planning to add employees to their workforce over the next 12 months, down from 52 percent in both the second quarter and the same period a year ago. The total net workforce growth projection in the third quarter was negative 0.2 percent, indicating further hiring cutbacks, said PwC.
However, companies are continuing with their capital investment and operational spending plans. The survey reveals that 37 percent of U.S. industrial manufacturers 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,” according to the report.
The survey also finds that 82 percent of respondents plan to increase operational spending, up from 75 percent in the second quarter and 69 percent last year. The biggest areas for increased expenditures were new product or service introductions (48 percent), research and development (37 percent), business acquisitions (23 percent) and information technology (22 percent).
Investments in information technology (IT) also is expected to be maintained with 90 percent of respondents planning to invest in IT technologies over the next 12 to 18 months, with infrastructure upgrades as the leading investment at 82 percent. The survey also finds that 80 percent of manufacturers have a multi-year (three to five years) plan that targets business capabilities and processes as well as IT systems. The biggest reasons for the investments are to reduce costs (84 percent) and support growth (72 percent).
On the flip side, fewer manufacturers are planning new business initiatives. Although 43 percent of manufacturers still plan on new initiatives, it’s down from 54 percent in the last quarter.
"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 stated. "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."
Plans for expansion to new markets abroad dropped to eight percent, down four points, with five percent planning new facilities abroad. Eight percent are planning to reduce abroad with seven percent are either closing or reducing facilities abroad and seven percent are reducing activities. Plans for joint ventures and strategic alliances are also down. New joint ventures are planned by 13 percent, down six percent, and new strategic alliances are expected by 13 percent, down 16 percent.
The report also indicates that U.S.-based industrial manufacturers that sell abroad reported a sharp decline in international revenue in the third quarter 2015. Only eight percent reported an increase in sales; 38 percent reported a decrease, and 54 percent reported flat sales. Yet, the survey also reveals that they expect international sales to account for 31 percent of total sales over the next 12 months, which is up four percent from the previous quarter and one percent up from a year ago.
Monetary exchange rate was ranked as the top barrier to growth over the next 12 months by 38 percent of respondents, up from 14 percent one year ago. Other barriers to growth include lack of demand (32 percent) and legislative/regulatory pressures (25 percent).
While optimism has faded for the global economy, U.S. industrial manufacturers still hold a positive outlook for the U.S. economy. With revenue forecasts still on pace, they expect to maintain their capital expenditure and operational spending plans over the next 12 months.