Manufacturing confidence bodes well for freight

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Optimism regarding the U.S. economy among U.S. industrial manufacturers improved markedly during the first quarter of 2012, while views of the worldwide economy remain guarded, improving only modestly due to continued high levels of uncertainty.” –Barry Misthal, global industrial manufacturing leader for global consulting firm PricewaterhouseCoopers

Sometimes in the rough-and-tumble world of freight you’ve just got to grab at whatever silver lining presents itself and hold on tight. And right now, rising optimism among big U.S. manufacturing firms seems to be one such lining in a very uncertain global economy – especially as manufacturing generates a healthy amount of trucking tonnage.

That at least is the view unearthed via the quarterly Manufacturing Barometer survey conducted by global consulting firm PricewaterhouseCoopers in the first quarter this year, based on interviews with 60 senior executives of large, multinational U.S. industrial manufacturing companies regarding current business performance, the state of the economy and their expectations for near-term growth.

“Although a large amount remains uncertain, we saw an increase in manufacturers who are optimistic about the world economy over the next 12 months,” Robert Bono, a partner in PwC’s industrial products practice, told me by email.

“We also saw an increase in manufacturers who expect international sales to go up as compared to the previous three months,” he added. “This increase in revenue will have a bigger effect on their bottom line as a result of the streamlining of operations and cost-cutting many manufacturers implemented during the recent economic downturn.”

Here are some of the specific takeaways regarding this manufacturing “optimism” garnered from PwC’s survey:

  • Optimism regarding the prospects of the U.S. economy over the next 12 months rose 40 points to 70% in the first quarter this year, while optimism for the world economy remained guard, climbing only 28 points to 44%.
  • Underscoring increased confidence levels overall, the projected average growth rate for own-company revenues rose to 5.6% for the year ahead, up from 4.4% reported in the fourth quarter of 2011. Overall, 92% of respondents expect positive revenue growth from their operations, with 17% forecasting double-digit gains and 75% seeing single-digit growth.  
  • Looking back at the first quarter of 2012, 68% of U.S. industrial manufacturers surveyed by PwC believed the U.S. economy was growing, up 40 points from 28% reported in the fourth quarter of 2011. None believed it was declining, and 32% saw no change from the fourth quarter of 2011. 
  • Some 36% of those polled believed the world economy was also growing in the first quarter this year, despite their cautious outlook for the future, up 20 points from the fourth quarter of 2011, while 16% believed that the world economy was declining, off 20 points from the fourth quarter, and 48% said they saw no change. 
  • The employment picture appears to be improving as well with 50% of industrial manufacturers planning to add employees to their workforce in 2012, up 13 points from the fourth quarter of 2011. Only 7% plan to reduce the number of full-time equivalent employees, and 43% will stay about the same. The net workforce projection is plus 0.8%, up slightly from last quarter’s plus 0.7%. 
  • Regarding investment spending, 82% of the executives polled said they plan to increase capital outlays in 2012, driven by new product or service introductions (52%), information technology (47%) and geographic & facilities expansion (42% each). 
  • The mean investment as a percentage of total sales rose from the fourth quarter’s moderate 4.2% percent to a robust 6% in the first quarter of 2012 – indicative of continued spending among the majority of panelist participants. 
  • Gross margins improved during the first quarter of 2012, moving higher for 45% of respondents and lower for 13%, for a net plus 32% – nine points higher than the fourth quarter of 2011.

Those are some pretty cheering figures if you ask me – all indicative of boosting freight demand. But of course there are some concerns as well.

(Then again, nothing’s perfect, and indeed, if everything WERE perfect, that might be a signal for more – not less – caution in some respects.)

  • In the first quarter 2012, costs and prices rose sharply: 50% of U.S.-based industrial manufacturers reported higher costs, and only 8% reported lower costs, for a net plus 42%, 25 points above the prior quarter. Some 43% raised prices but 7% lowered them, for a net plus 36% reporting higher prices, up 14 points over the fourth quarter of 2011.  
  • The top three perceived barriers to growth were oil/energy prices (53%), lack of demand (47%) and legislative/regulatory pressures (40%).

Still, on balance, the signs are good for manufacturing – and thus potentially for freight flows as well from this economic sector.

“In spite of exposure to increased costs globally, industrial manufacturers generated margin growth in the first quarter as they continued to benefit from operating efficiencies and improved pricing flexibility. This uptick in profit levels bodes well for investment spending as companies put their cash to work in the coming months,” noted Barry Misthal, PwC’s global industrial manufacturing leader.

“Following a prolonged period of streamlining and cost-cutting during the downturn, there is no question that companies have achieved efficiency gains, while balance sheets improved measurably,” he added. “Hence, management teams are increasingly focusing on strengthening their product offerings and competitive positioning, as well as evaluating global expansion strategies through both M&A and new facilities building.”

At this point, then, with Europe heading for recession and the U.S. in slow-growth mode, this outlook represents a nice ray of light for trucking. 

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