Manufacturers turn cautious on global economic outlook, says survey

Sentiment regarding the direction of the global economy took a sharp turn downward among U.S. industrial manufacturers, according to the Q3 2015 "Manufacturing Barometer" from PwC US. Global concerns also served to moderate optimism regarding the domestic outlook, while slowing plans to hire more workers. At the same time, capital and operational spending forecasts among U.S. companies remained healthy.

During Q3 2015, optimism regarding the direction of the global economy dropped to 23 percent from 38 percent in the previous quarter and 30 percent in Q3 2014. In addition, pessimism rose to an equal level with optimism (23 percent), reflecting an uncertain outlook for international commerce. Further, 40 percent of respondents indicated they believed the world economy was declining, showing greater concern than in the previous quarter (25 percent in Q2).

Conversely, optimism regarding the U.S. economic outlook remained positive but dropped to 60 percent in Q3 2015 from 69 percent in Q2. Despite the renewed sense of caution regarding the global stage, company revenue forecasts for the next 12 months rose to a moderately high 5.3 percent in Q3 compared to a forecast of 4.9 percent in Q2.

"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. "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."

As a result of the decline in global sentiment, U.S. industrial manufacturers scaled back hiring plans in Q3, with only 37 percent planning to add employees to their workforce over the next 12 months, down 15 points from the 52 percent level indicated in both Q2 2015 and year ago comparable period. The total net workforce growth projection in Q3 was -0.2 percent, indicating further cutbacks in hiring among industrial manufacturing firms.

Among the minority of panelists planning to hire within the next 12 months, the most sought-after employees will be blue collar/skilled labor (23 percent) and professionals/technicians (25 percent). Limited white collar support, middle management, and sales/marketing hiring is planned.

Despite the tempered global outlook, 37 percent of U.S. industrial manufacturers surveyed plan major new investments of capital during the next 12 months, up slightly from Q2 and the 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 Q2 and on par with 5.7 percent in Q3 2014. Operational spending plans remained healthy as well, with 82 percent indicating plans to increase operational spending, up from 75 percent in Q2 and 69 percent last year. Leading increased expenditures were new product or service introductions (48 percent), R&D (37 percent), business acquisitions (23 percent), and information technology (IT) (22 percent).

Looking at perceived barriers to entry, the monetary exchange rate became the leading headwind to growth over the next 12 months, as indicated by 38 percent of respondents. A year ago, it was only 14 percent (24 points lower). Typical barriers to growth—lack of demand (32 percent) and legislative/regulatory pressures (25 percent)—were lower as the monetary exchange rate took center stage.

PwC also surveyed respondents on investment in IT and found that 80 percent of manufacturers report having a multiyear plan (three to five years) that addresses business capabilities and processes as well as IT systems. Industrial manufacturing companies' IT investments are made primarily to reduce costs (84 percent) and support growth (72 percent). Overall, 90 percent are planning to invest in IT technologies over the next 12 to 18 months, with upgrading infrastructure the leader at 82 percent.

The "Manufacturing Barometer" is a quarterly survey based on interviews with 60 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. The survey summarizing the results for Q3 2015 was conducted from June 24, 2015, to September 28, 2015. To view the complete report, visit www.pwc.com/manufacturing-barometer.