Manufacturers remain optimistic despite growing concerns about strong U.S. dollar

Although the potential impact of the strong dollar is causing uncertainty, optimism among U.S. industrial manufacturers regarding the direction of the domestic economy continues to rise, according to the Q1 2015 Manufacturing Barometer released by PwC US, New York. The broad sense of optimism about overall economic conditions and improvements in global demand was offset by concerns about pricing and margins and the potential effect of currency on international revenues.

Optimism regarding the prospects of the U.S. economy during the next 12 months increased among U.S. industrial manufacturers to 76 percent during Q1 2015, up from 68 percent in the previous quarter and 71 percent in Q1 2014. The level of optimism reported was the highest since Q4 2005. Optimism about the world economy also improved, but by a more modest 4 points to 42 percent as compared to Q4 2014.

“As we see increasingly positive views about the domestic economy among U.S. industrial manufacturers, a majority of management teams continue to indicate plans to hire skilled workers and invest in their businesses, with the bulk of spending centered on new products or service introductions,” said Bobby Bono, PwC’s U.S. industrial manufacturing leader. “We also saw a spike in sentiment regarding potential M&A activity, while plans to expand abroad softened, reflecting increased concerns about the impact of the strengthening dollar. Overall, the outlook for U.S. industrial manufacturers remains positive, and we are seeing healthy levels of capital investment.”

Despite the positive sentiment, projected company growth forecasts moderated slightly, primarily because of reduced expectations regarding the level of sales contributions from international operations. The strong U.S. dollar means foreign currency translation may have an immediate effect on revenues and free cash flow, as local currency is converted into fewer dollars. Manufacturers also are reporting a weaker pricing environment and an inability to pass through costs, putting margins at risk.

On the other hand, internationally, European PMI is indicating stronger growth, and concerns regarding growth rates in Asia have softened. So the strong dollar has been a mixed blessing for U.S. manufacturers, stimulating global demand and improving the overall economic outlook, but at the expense of short-term U.S. profits.

Only 19 percent of U.S. industrial manufacturers plan to expand to new markets abroad, while only 12 percent plan for new facilities abroad, both down from Q4 2014’s barometer. The decreased sentiment toward overseas expansion dovetailed with elevated concerns regarding the strong dollar and increased foreign competition. Along similar lines, among respondents with international operations, the projected contribution from international sales to total revenue over the next 12 months decreased to 27 percent, the lowest level since Q4 2006.

According to the survey, 83 percent of respondents are planning for operational spending, the highest level in 10 quarters. Leading increased expenditures were new product or service introductions (55 percent), R&D (40 percent), and information technology (33 percent). In addition, plans for M&A increased during the first quarter, with 43 percent of respondents indicating an interest, particularly plans to purchase another business or sell part or all of their own company.

Survey respondents continued to identify lack of qualified workers (35 percent), legislative or regulatory pressures (33 percent), and lack of demand (29 percent) as leading barriers to growth. On the rise are two potential barriers to growth linked to the stronger U.S. dollar—concern about the monetary exchange rate/higher dollar (21 percent) and the related competition from foreign markets (17 percent)—along with pressure for increased wages (17 percent).

“The impact of the rising dollar on exchange rates has fueled increased concerns regarding the level of international sales, causing some management teams to pull back modestly on overseas investments until the outlook becomes clearer,” Bono added. “At the same time, the growing U.S. economy and ongoing competitive environment is influencing the flow of capital into research and development, information technology, and transactional activity on the domestic front.”

PwC's Manufacturing Barometer is a quarterly survey based on interviews with 58 senior executives of large, multinational U.S. industrial manufacturing companies about their current business performance, the state of the economy, and their expectations for growth over the next 12 months. This survey summarizes the results for Q1 2015 and was conducted from Dec. 23, 2014, to March 20, 2015. To view the complete Manufacturing Barometer report, visit www.pwc.com/manufacturing-barometer.