Manufacturing barometer 1Q 2006

NEW YORK, April 27, 2006— Two-thirds (67 percent) of U.S. industrial manufacturers are absorbing higher energy costs, rather than passing them through to customers, according to PricewaterhouseCoopers’ latest Manufacturing Barometer. These companies predict that energy costs will rise further over the next 12 months, and the majority is concerned that the higher price of energy will serve as a potential barrier to growth.

Sixty-seven percent of industrial manufacturers surveyed by PricewaterhouseCoopers are able to pass along some, very little or none of the increased energy costs. Only 27 percent are able to pass along all or most of the cost (six percent did not report). Overall, 63 percent anticipate further increases in energy expenditures over the next year. The same number - 63 percent - think rising energy costs could hurt the growth of their companies.

In spite of energy concerns, industrial manufacturers remain confident of their financial futures. Those surveyed projected an average revenue growth of 7.8 percent during the next year, due in large part to international prospects. Optimism about the world economy has increased to 77 percent of respondents (versus 71 percent last quarter). Although optimism about the U.S. economy remained high at 67 percent, the number of optimistic respondents decreased by nine points from last quarter.

“The growing optimism about overseas markets likely stems from increased sales in strengthening European and Asian economies,” said Jorge Milo, leader of PricewaterhouseCoopers' U.S. industrial manufacturing practice. “Some companies are probably expecting that the weak dollar will continue to make U.S. exports attractive, while others appear to see local growth opportunities warranting increased operations abroad.”

More than half of companies marketing abroad recorded increased sales last quarter, while only eight percent had a decrease. International marketers now expect sales abroad to contribute 33 percent of their total revenue over the next 12 months – up from 30.7 percent projected last quarter. Thirty-five percent with operations abroad expect to expand to new overseas markets over the next 12 months, and 30 percent are planning new manufacturing or distribution facilities abroad.

Industrial manufacturers reported a decrease in planned investments. Forty-seven percent expect to make major new investments of capital over the next 12 months, down from 57 percent in the prior quarter and 60 percent a year ago. Investments are expected to average 8.4 percent of revenues, versus 9.8 percent in the prior quarter. However, increased investments are expected in three key areas: new product/service introductions (53 percent, up 8 points), research and development (42 percent, up 8 points), and information technology (38 percent, up 6 points).

While revenue projections held steady at 7.8 percent, compared to 7.7 percent last quarter and 6.5 percent a year ago, executives indicated other reverberations from climbing costs. As a group, industrial manufacturers now expect the size of their workforce to decrease by an average of –1.7 percent in the year ahead, a turnabout from the positive growth of 2.0 percent projected last quarter– attributable to several large manufacturers planning sharp employee cutbacks. Currently, 58 percent are planning to increase their workforce over the next 12 months—similar to 61 percent in the prior quarter, and ahead of the 52 percent of a year ago.

“Although strong revenue growth is expected, some industrial manufacturers are taking a more cautious approach concerning investments of capital and human resources, likely due to the lack of stability in energy costs,” said Milo.

Escalating energy prices continue to challenge strong, profitable growth for most U.S.-based industrial manufacturers. Of the nearly two-thirds citing energy prices as a potential barrier, growth was estimated at a 7.3 percent pace, versus 8.8 percent for their peers, or 17 percent slower. Overall, 70 percent say that higher energy prices have had a negative impact on the profit margins of companies in their industry, including 35 percent citing a strong impact, and 35 percent a moderate one.

Despite increased energy costs, three-quarters of respondents were able to either increase margins (35 percent) or at least keep them the same (40 percent) over the past quarter.

“These companies are holding the line or even increasing margins, in spite of escalating energy costs,” said Milo. “They are expecting solid revenue growth, and if they can continue to find new ways of dealing with increasing energy prices, these companies can continue to thrive.”

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

		Quick Scorecard			2005																	2006
						1Q				2Q				3Q				4Q				1Q				Quarterly Movement
		Believe domestic economy is growing				89%				82%				75%				87%				92%				↑
		Optimistic about US economy next 12 months				71				54				45				76				67				↓
		Optimistic about world economy				70				46				54				71				77				↑
		Expect positive revenue growth next 12 months				88				83				91				97				92				↓
		Average % growth expected				6.5				6.5				7.8				7.7				7.8				←→
		Planning major new investments next 12 months				60				42				60				57				47				↓
		New investments as a % of revenue				6.3				8.3				8.0				9.8				8.4				↓
		Planning to add workers next 12 months				52				43				52				61				58				←→
		New workers as a % of workforce (net)				+0.9				+0.6				-0.5				+2.0				-1.7				↓

For more information about Barometer surveys, including recent economic trend data and topical issues, please visit our web site: www.barometersurveys.com. Accompanying charts available upon request.

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	Full Report of Manufacturing Barometer Survey
	481 Kbytes - Adobe Acrobat File

	Executive Summary of Manufacturing Barometer Survey
	424 Kbytes - Adobe Acrobat file

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