Industrial manufacturers are expressing optimism about domestic and global economic prospects, citing early signs of new hiring and price flexibility while forecasting stronger revenues following higher-than-expected Q4 results.

Overall, optimism about the United States economy’s prospects over the next 12 months is on a major upswing, due in large part to stronger revenue forecasts and improved international revenue contributions, according to PricewaterhouseCoopers’ (PwC) newly released fourth-quarter U.S. Manufacturing Barometer. Based on interviews with 62 senior executives of large, multinational U.S. industrial manufacturing firms, 63 percent of respondents were optimistic about the U.S. economy’s prospects over the next year, a sharp rise of 28 points from the prior quarter’s 35 percent.

The current level of optimism, 16 points higher than a year ago, has not been this high since Q2 2007 (62 percent).

Among international marketers, the majority (67 percent) viewed the world economy as growing in Q4, up 24 points from the prior quarter. Only 3 percent believed it was declining, and 30 percent felt it was unchanged.

“The major shift from uncertainty to optimism in this quarter’s findings gives us good reason to be hopeful. We may now begin to see industrial manufacturers start making business decisions in a less guarded, more confident manner as we move into 2011,” Barry Misthal, U.S. industrial manufacturing leader for PwC, said in an announcement of the latest quarterly report. “The industry is looking quite strong and steady compared with the past couple of years, and manufacturers appear poised for a robust start to the new year.”

In Q4 2010, the majority (61 percent) of respondents believed the U.S. economy was growing, a 34-point increase from the prior quarter. Thirty-seven percent believed the U.S. economy did not change from Q3 2010, and only 2 percent believed it was declining.

U.S. manufacturing companies posted higher-than-expected Q4 results in January, as sharply improved margins boosted profits amid strong industrial demand and growth in emerging markets. General Electric Co. said the number of orders for big-ticket equipment and services, a closely watched indicator of future revenue in its industrial businesses, increased in the fourth quarter of 2010. Other industrial companies, including Caterpillar Inc., Tyco International Ltd. and Eaton Corp., also reported strong sales and earnings, and experts are looking ahead for signs the industrial rebound will begin to affect the wider economy and boost employment.

“Caterpillar more than quadrupled its fourth-quarter profit over the previous year’s weak results, as stronger demand, especially in developing nations, helped increase global sales of mining and construction equipment,” the Associated Press reported last week. “The Peoria, Ill., based company [...] generated $968 million net income, or $1.47 per share. That’s much higher than the previous year’s $232 million net income, or 36 cents per share, but 2009′s fourth quarter was also hurt by layoff costs that consumed 5 cents per share of profit.”

“Tool maker Kennametal [...] raised its full-year forecast above [Wall Street] estimates amid strong demand from industrial and transportation markets,” according to Reuters. “Profit at Timken, maker of bearings and specialty steel, was helped by auto and truck production and an ability to push through higher prices. Electrical and electronics products maker Hubbell Inc. also beat [expectations], as did Harsco, which provides products to metals producers. Conglomerate Danaher Corp showed sharply higher profits in its industrial components and test-and-measurement segments. It affirmed 2011 earnings targets.”

For U.S.-based industrial manufacturers that sell abroad, international markets showed notable improvement in Q4 2010, with 59 percent of industrial products manufacturers reporting to PwC an increase in sales, up 15 points quarter-to-quarter, while only 2 percent reported a decrease.

“We’re very optimistic about what’s going on in the developing parts of the world,” Caterpillar CFO Edward Rapp said in an interview with the Wall Street Journal.

Moreover, the projected contribution of international sales to total revenue over the next 12 months totaled 38 percent, up 2 points from the prior quarter and a four-point increase over a year ago (34 percent).

Regarding Caterpillar’s overseas growth, the Financial Times (subscription required) reports that in China, the company is expanding its excavator production by 400 percent by 2013, raising production by 60 percent next year alone. “These investments in our future will add cost in the short term but are essential to be prepared for continued growth as the economic environment improves,” Caterpillar CEO Doug Oberhelman said.

In PwC’s findings, the projected average growth rate for respondents’ own company’s revenue over the next 12 months showed increasing strength, rising to 6.6 percent, up from 5 percent in the previous quarter and more than double what it was a year ago (2.7 percent). Meanwhile, 84 percent of respondents expect positive revenue growth for their own companies in the year ahead, with 34 percent forecasting double-digit growth (up 16 points) and 50 percent forecasting single-digit growth.

In Q4 2010, gross margins remained positive, up for 34 percent of respondents and down for 19 percent, for a net +15 percent, similar to Q3′s +17 percent. Costs and prices were both on the rise in Q4. Net costs were up for 26 percent and lower for 15 percent, for a net +11 percent. Respondents reported “a notable increase” on the pricing side, with prices up for 32 percent and down for 11 percent, for a net +21 percent (up 14 points) — “the first strong sign in recent years of emerging price flexibility and pricing increases,” PwC says.

Looking at the next 12 months, 82 percent are planning to increase operational spending, led by increases in new product or service introductions (50 percent) and research and development (45 percent). Meanwhile, prospective spending for geographic expansion, information technology and, for the first time, e-commerce, are all on the rise this quarter. Additionally, plans for new facilities abroad jumped 9 points to 27 percent.

For the fourth consecutive quarter, legislative/regulatory pressures were perceived as the largest barriers to growth over the next 12 months (68 percent), although these key challenges declined 9 points from the previous quarter. While concern about demand remained high (63 percent), two other important potential barriers to growth declined as well, including concern about taxation policies (47 percent, down 13 points) and decreasing profitability (29 percent, down 11 points). Concern about competition from foreign markets dropped from 43 percent to 36 percent.

Meanwhile, concern about lack of qualified workers rose 5 points to a still-low 13 percent, the largest gain of the quarter.

Although the latter part of 2010 was a period of economic recovery for most industrial firms, employment conditions continue to lag and millions of Americans still struggle to find work.

However, over the next 12 months, 48 percent of industrial executives plan to add employees to their workforce, up 6 points from last quarter and 18 points from a year ago (30 percent), according to PwC’s manufacturing barometer. Only 2 percent plan to reduce the number of full-time-equivalent employees, while half plan to keep payrolls about the same. The net workforce projection is +1.2 percent, up from 0.4 percent both last quarter and a year ago, a sign of moderate new hiring growth.

Of those planning to hire, the most sought-after employees will be professionals/technicians and skilled laborers.

Resources

Manufacturing Barometer Business Outlook Report 4Q 2010
PricewaterhouseCoopers, January 2011

Optimism for U.S. and global economic outlooks rises sharply among U.S. Industrial Manufacturers…
PricewaterhouseCoopers, Jan. 27, 2011

GE Q4 2010 Earnings Release
General Electric Co., Jan. 21, 2011

Caterpillar Q4 2010 Earnings Release
Caterpillar Inc., Jan. 27, 2011

Tyco Q4 2010 Earnings Release
Tyco International, Jan. 27, 2011

Eaton Q4 2010 Earnings Release
Eaton Corporation, Jan. 27, 2011

Caterpillar’s 4Q Profit Quadruples as Sales Soar
by Josh Funk
The Associated Press, Jan. 27, 2011

U.S. Manufacturing Profits Suggest Stronger Economy
by Nick Zieminski and James Kelleher
Reuters, Jan. 27, 2011

Caterpillar Sees Sales Overseas Surging
by James Hagerty and Bob Tita
The Wall Street Journal, Jan. 28, 2011

Caterpillar Forecasts Record Profits in 2011
by Hal Weitzman
Financial Times, Jan. 27, 2011

MAPI Survey on the Business Outlook: Index at 75 Percent as Sector Continues to Show Strength
Manufacturers Alliance/MAPI, Jan. 13, 2011