American manufacturers continue to be optimistic about business and revenues despite concerns about rising costs and the shortage of qualified workers. A benchmarking survey by Chicago-based manufacturers buying group Prime Advantage, revealing the business expectations and top concerns of more than 750 small and midsize U.S. manufacturing firms, indicates that companies expect second-half revenues to be higher than revenues over the first six months of 2014. Meanwhile, a PricewaterhouseCoopers study focusing on large, multinational U.S. manufacturers echo similarly strong growth predictions for the remainder of 2014.
Forty-nine percent of respondents reported that they expect revenues to accelerate in the second half of 2014 in Prime Advantage's 13th Purchasing and Manufacturing Survey. Of these respondents, 22 percent anticipate revenue growth will be more than 10 percent greater this year than last year, while 28 percent expect revenue growth of up to 10 percent. Just 2 percent believe they may be facing a decrease in revenue up to 10 percent.
If the 49 percent figure seems low, it is stronger than last year's Prime Advantage survey, when just 42 percent anticipated that revenue growth would be higher in the second half of 2013 than in the first half of that year. Moreover, the group said the number of manufacturers with revenue decreases has declined steadily since the end of the recession.
"Our members are making some of the highest projections for the next six months that we've ever seen," said Louise O'Sullivan, founder, president, and CEO of Prime Advantage. "Revenue forecasts, capital expenditure plans, and labor force expectations are all at record levels. Our members are becoming more energy efficient, more sustainable, and more technologically advanced."
Founded in 1997, Prime Advantage is a buying consortium for manufacturers, with more than 750 members and 130 endorsed suppliers. The group's main function is bringing its membership the best possible savings on raw materials, OEM components, supplies, and services through supply chain partnerships and collaborative resources.
Responding executives to the group's business-climate survey indicated that improved customer demand will fuel expected revenue increases (63 percent). Fifty percent of companies expect to hire in the next six months, while only 1 percent predicts layoffs.
Even President Barack Obama and the White House are seeing manufacturing positives, including growth among businesses, hiring, and reshoring. On Oct. 3, National Manufacturing Day, the White House issued a fact sheet that stated: "Since February 2010, American manufacturing has added 700,000 jobs, the fastest pace of job growth since the 1990s. The sector has grown at nearly twice the rate of the economy overall, the longest period of outpacing the economy since the 1960s."
In his remarks on Manufacturing Day, the president noted, "More than half of all manufacturing executives have said they are actively looking at bringing jobs back from China."
There are many positive signs for U.S. manufacturers, but chronic threats remain. The cost of raw materials continues to be a key purchasing concern for Prime Advantage members, with the survey indicating an ever-greater focus on cost savings and efficiency. And the top barrier to continued business growth is the challenge of getting qualified workers, at a 53 percent response rate.
Capital expenditures are expected to increase in the second half of 2014 for 42 percent of the midsize manufacturing companies that were surveyed, an increase of 12 percent from 2013's survey.
These Prime Advantage numbers mirror data from the Institute for Supply Management's (ISM) September PMI report, which settled in at 56.6 percent, a decrease of 2.4 percentage points from August's reading of 59 percent. The measure, though lower, still shows a trend of continued expansion in U.S. manufacturing. The ISM's PMI is a composite index based on the diffusion indexes of five indexes that measure industrial purchasing activity, and a reading higher than 50 signals growth.
Half of all survey respondents are predicting that they will have new hires in the next six months, an increase of 3 percent from Prime Advantage's second-half 2013 survey. Forty-nine percent predict that hiring will match first-half levels.
Both raw materials supply and cost concerns remained elevated, while healthcare cost pressure aggravated manufacturers, according to responses in the Prime Advantage survey.
Procurement professionals at manufacturing companies continued to cite the cost of raw materials as their top purchasing concern for the second half 2014, at 41 percent. Processes and efficiency in sourcing were the second-greatest concern (38 percent), followed by the cost of baseline materials, such as oil and gas (17 percent).
When asked to identify the top three cost pressures for the last half of 2014, respondents cited raw materials (45 percent), up 13 percent from last year and on par with the 42 percent cited in February 2013. Healthcare cost pressures remained the second-greatest concern (21 percent), though down from a year ago, followed by labor costs (18 percent), which have been steadily climbing since February 2013.
After the lack of qualified workers, survey respondents identified the top barriers to business growth over the next 12 months as legislative and regulatory pressures (45 percent) and foreign competition (30 percent).
A separate periodic assessment of large manufacturers was mainly encouraging, as well. According to the Q3 2014 Manufacturing Barometer survey by PricewaterhouseCoopers, large U.S. manufacturers are predicting strong revenue growth for the quarter. Moreover, survey respondents forecast an average growth rate of 5.6 percent over the next 12 months. PwC US released the results of its survey last week.
Breakdown of supply chain management concerns. Click to enlarge. Source: Prime Advantage
That pace is higher than the second-quarter survey's 5.2 percent growth estimation and notably higher than the Q3 survey a year ago (4.2 percent). Looking ahead, 86 percent expect positive revenue growth, up 9 points quarter-to-quarter, and only 6 percent forecast either zero or negative growth. In the face of international "uncertainties," international sales did not quite maintain the upbeat pace, continuing with a 30 percent prospective revenue contribution, off 2 points.
Still, the calendar-year 2014 pace of company revenues was notably below the 12-month forecast: 4.6 percent versus 5.6 percent. And optimism regarding the prospects of the U.S. economy for the next 12 months dropped to 57 percent during the third quarter, compared to 65 percent in the previous quarter and 60 percent in the third quarter of 2013. For the same time frame, optimism about the world economy among PwC survey respondents dropped to 30 percent, down from 38 percent in the second quarter.
Barometer survey respondents said they are moderating their plans for new capital investments, with 36 percent of respondents indicating increased outlays in the next 12 months, down from 52 percent in the previous quarter and 48 percent in the third quarter last year.
"The improved outlook for company performance ran counter to a decline in sentiment regarding the direction of the economic environment, particularly on the international stage," said Bobby Bono, PwC's U.S. industrial manufacturing leader. "At the same time, we saw a notable uptick in caution regarding the potential impacts of legislative/regulatory and taxation policies. This tells us management teams believe they are making the right decisions to grow, but remain leery of external factors beyond their control, resulting in some abatement in the level of near-term spending and investment plans."
PwC's Manufacturing Barometer is a quarterly survey based on interviews with 58 senior executives of large, multinational U.S. industrial manufacturing companies about their current business performance, the state of the economy, and their expectations for growth over the next 12 months. PwC US provides industry-focused audit and assurance, consulting, and tax services to public, private, and government clients in all markets.
Michael Keating is senior editor for Government Product News and a contributing editor for American City and County, both published by Penton Media. Read his mid-year 2014 government budget and spending forecast at the Government Product News site. Go here for his report on how to land government business. Read his latest ThomasNet News installment on disaster planning here. Keating has written articles on the government market for more than 100 publications, including USA Today, Sanitary Maintenance, IndustryWeek, and the Costco Connection. He can be reached at email@example.com.
Top cost pressures for small and midsize manufacturers. Click to enlarge. Source: Prime Advantage