The industrial sector's economic recovery has been slow and fragile, with many manufacturers struggling to deal with declining orders, lowered profitability and reduced markets for a wide range of industrial products and services. However, new data show that manufacturers' confidence about future financial prospects is returning, particularly among small and medium-sized companies.

According to the latest annual Group CFO Survey from industrial buying consortium Prime Advantage, released in March, 67 percent of respondents among small and mid-sized manufacturing companies reported feeling more optimistic about the economy in 2010 than in 2009.

Sixty-four percent of manufacturers said they are also more optimistic about their own company's financial outlook for the year. In evaluating their financial prospects for the rest of 2010 on a scale of one to 10, with 10 being the most optimistic, more than half the respondents ranked themselves at seven or higher.

Prime Advantage's latest findings show a significant improvement in outlook over the previous survey. In the consortium's 2009 CFO survey, 55 percent of respondents said they were pessimistic about the economy and 45 percent were pessimistic about their own company's financial future. By contrast, 64 percent of respondents to this year's survey believe the manufacturing economy will expand in 2010.

These gains in manufacturers' confidence reflect broader growth in industrial production and capacity utilization. According to a report from the United States Federal Reserve this month, industrial production grew by 0.1 percent in February and 0.9 percent in January. Industrial output in February climbed 1.7 percent above the prior-year level, while capacity utilization rose 0.2 percentage points to 72.7 percent.

Despite these promising signs, recessionary effects are still widespread and are likely to remain problematic through 2010. In the Prime Advantage survey, 91 percent of manufacturers said they and their customers are being negatively affected by tightened credit availability and 57 percent stated that domestic factory employment will not return to year-end 2007 levels until 2011 or 2012. However, 82 percent of manufacturers said they would hire additional staff if demand rises in 2010.

The most commonly cited methods for addressing these challenges include the following: reducing inventory levels (79 percent); improving purchasing and sourcing efficiency (52 percent); and implementing asset and inventory optimization plans (48 percent). Additionally, 70 percent of firms plan to continue cutting operational costs, while 55 percent are developing new products and services to meet changing demand requirements.

Uncertainty about consumer demand remains the top external concern among CFOs surveyed by Prime Advantage, though it has become less pressing — cited by 61 percent in 2010 versus 76 percent in 2009. Twenty-eight percent said pricing pressures are the primary external issue, while 19 percent are most worried over government policies.

Prime Advantage's findings echo those of a late-2009 survey from Duke University and CFO Magazine, which found that weak consumer demand, federal policies, price pressures and credit markets are the top economy-wide concerns for 2010.

"The turmoil in the workplace has harmed employee morale, with 37 percent of CFOs reporting morale at their company is poor or fair; by comparison only 5 percent of firms had poor or fair morale before the recession," the Duke University/CFO Magazine report explains.

Among the primary internal concerns cited in the Prime Advantage survey, health care costs (28 percent), the ability to forecast results (25 percent) and maintaining employee morale and productivity (22 percent) top the list.

Confidence is growing among manufacturers, but turning optimism into sustainable economic gains will require careful cost management and an awareness of the issues facing employees, particularly those in small to mid-sized businesses.

Resources

Small and Midsized Industrial Manufacturing CFOs Reveal Their Top Concerns of 2010
Prime Advantage, March 5, 2010

...Manufacturers Becoming Optimistic About Economy
Prime Advantage, Sept. 2, 2009

Industrial Production and Capacity Utilization
Federal Reserve, March 15, 2010

Global CFO Survey: Employment Outlook Bleak, But Business Prospects Improve
Duke University/CFO Magazine, Dec. 16, 2009