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Every quarter the Manufacturing Barometer explores the current and future state of the industrial manufacturing economy based on interviews with 60-70 senior executives from large, multinational manufacturing companies.

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Summary of 2006 4Q results

Optimism rebounds among industrial manufacturers

January 25, 2007—Industrial manufacturers’ optimism about the U.S. economy over the next 12 months rebounded in the fourth quarter of 2006 from the previous quarter with an increase from 45 percent to 64 percent, according to PricewaterhouseCoopers’ Manufacturing Barometer, a quarterly survey of U.S. industrial manufacturing executives. Optimism about the world economy also rose from 58 percent to 69 percent.

Yet, despite this increase in optimism, slower growth is expected. Growth projections for the next 12 months dropped from 7.3 percent in the prior quarter to 6.2 percent, a fifteen percent drop-off. This is the lowest projected growth reported since the first quarter of 2004.

Planned major new investments as a percent of revenue over the next 12 months remained steady at 6.5 percent, in line with the prior quarter's 6.6 percent. However, this is down significantly from the year earlier level of 9.8 percent.

Hiring plans showed a continued downturn in those planning to add new workers. A year ago, 61 percent expected to increase their workforce over the coming year. This past quarter, only 33 percent plan to do so. Those planning to decrease their workforce have risen slightly to 12 percent from 7 percent over that same time period.

“Optimism in the sector peaked during the fourth quarter of 2005 as manufacturers planned major new investments and increases in their workforce,” said Barry Misthal, PricewaterhouseCoopers' Industrial Manufacturing sector leader. “Optimism waned throughout 2006, bottoming out in the third quarter, most likely a result of continued high energy costs. Executives' optimism bounced back this most recent quarter, but with moderated growth projections. The biggest challenge for them now is creating sustainable businesses that will prosper long-term.”

Concern around demand remained a negative factor, although it fell off to 39 percent from 48 percent in the prior quarter. And, despite lower oil prices in recent months, oil/energy prices remained the leading potential barrier to growth over the next 12 months, rising from 48 percent to 62 percent of manufacturers, in line with the first half of 2006. Two additional potential barriers were revealed in the fourth quarter of 2006 – concern about legislative/regulatory pressures rose from 25 percent to 34 percent and new anxieties about taxation policies rose from a low eight percent to 20 percent this quarter.

Increased investments are planned for over the next 12 months in a wide range of areas, led by new product/service introductions (43 percent), geographic (43 percent) and facilities expansion (41 percent), IT (39 percent) and business acquisitions (34 percent).

On a quarterly basis, fewer firms reported cost increases in the fourth quarter of 2006, and fewer reported price increases. Gross margins were directionally downward for the quarter (26 percent stated they were up, while 34 percent stated they were down). Looking out over the next 12 months, however, only 21 percent cited decreased profitability as a potential barrier to company growth (off nine points from the prior quarter).

“Industrial manufacturers expect a slowdown over the next 12 months, more of a soft landing, and they have moderated their plans for new hiring and levels of new capital spending. While wary about oil/energy costs, demand, new legislation/regulatory pressures and tax policies, they do not anticipate a sharp economic downturn in the U.S. or world economies,” said Misthal.

PricewaterhouseCoopers’ Manufacturing Barometer is developed and compiled with assistance from the opinion and economic research firm of BSI Global Research, Inc.

Media contact: Jim Clayman, jim.clayman@us.pwc.com, (636) 405-1672

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