US industrial manufacturers plan for better times ahead

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July 22, 2014

 

By Bobby Bono, Partner, US Industrial Manufacturing Leader

US manufacturers are moving ahead with their investment plans, according to our Q2 2014 Manufacturing Barometer report. About half of respondents are planning longer-term CAPEX spending – up 13 points from the prior quarter. Three-quarters of manufacturers say they will invest in shorter-term operational spending, focused on research and development (R&D), new product or service introductions, and information technology. More than a third of manufacturers say they are planning merger or acquisition (M&A) activity, especially the purchase of another business.

The level of optimism reflected in these investment numbers comes despite a drop in last quarter’s US GDP and a six-point decrease in optimism levels. When it comes to the US economy, it appears that respondents think last quarter’s numbers were largely an anomaly because they are planning to increase investment. They are also expecting to grow: 77 percent of survey respondents expect positive revenue growth for their own companies in the next 12 months – an increase of six points from the first quarter. Yet manufacturers are still being very measured in their hiring plans. As in previous quarters, the workforce is expected to increase by only 0.5 percent overall. This tepid hiring growth may be a result of continuing uncertainty about prospects in the global economy.

R&D is becoming more of a focus for companies. Spending plans for R&D rose to 45 percent – a significant increase from 34 percent in the first quarter. Respondents also plan to invest in information technology and new product or service introductions, but spending projections for these items are more in line with last quarter’s.

Another positive indicator for US manufacturers is that more M&A activity is being planned. The jump from last quarter’s 28 percent is substantial, with 38 percent now saying they are interested in M&A. Those that say they will focus on the purchase of another business also jumped 10 points, from 25 percent to 35 percent. However, firms’ plans to expand to new markets abroad were down sharply, from 18 percent last quarter to 12 percent this quarter.

In looking at the overall picture, we see that US manufacturers are looking for the right opportunities to deploy their cash. They will invest in R&D to strengthen their core product offerings, rather than enter new markets or expand abroad. Right now, the weighing of opportunity and risk strongly favors the domestic marketplace.

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