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PwC: Major Capital Spending Plans on the Rise

July 21, 2014, 07:00 AM
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Topic: Manufacturing

Optimism regarding the direction of the domestic economy remained positive among U.S. industrial manufacturers during the second quarter of 2014, according to the Q2 2014 Manufacturing Barometer, released by PwC US.  In addition to the positive sentiment, PwC’s report showed a rise in capital spending plans among industrial manufacturers as they focus on utilizing their cash positions to strengthen their products, add personnel and secure technology in a highly competitive market.

Optimism regarding the prospects of the U.S. economy during the next 12 months dropped among U.S. industrial manufacturers to 65 percent during the second quarter of 2014, compared to 71 percent in the first quarter.  However, sentiment rose slightly from 63 percent in the second quarter of 2013 and none of the respondents were pessimistic regarding the domestic outlook.  Of the U.S. industrial manufacturers polled, optimism about the world economy was at 38 percent during the second quarter of 2014, down slightly from 42 percent in the first quarter, but up from 31 percent a year ago.  Still, uncertainty regarding the global economic outlook remains high, with 57 percent of respondents indicating uncertainty compared to 50 percent in the first quarter.

“We saw a notable increase in indications for both long-term capital investment and short-term spending plans during the second quarter,” said Bobby Bono, PwC’s U.S. industrial manufacturing leader.   “Companies have maintained historically high levels of liquidity and are increasingly looking to put this money to work in strengthening their operations, adding talent and improving technology in a highly competitive marketplace.  Plans for R&D spending reached the highest level in the past five quarters, as management teams look to differentiate their products and enhance the value proposition they offer to their customers.  This comes against a backdrop of sustained optimism regarding the domestic economy, coupled with a continued high level of uncertainty regarding the direction of global commerce.”

Regarding actual company growth expectations, 77 percent of survey respondents expect positive revenue growth for their own companies in the next 12 months, with nine percent forecasting double-digit gains and none anticipating decreased revenues.  The projected average revenue growth rate for own-company revenue over the next 12 months was 5.2 percent, consistent with last quarter’s 5.3 percent, and above the 4.6 percent recorded in the second quarter of 2013.

Plans for new investments of capital rose notably during the second quarter of 2014, with 52 percent of respondents indicating increased outlays in the next 12 months, up from 39 percent in the previous quarter and 40 percent in the second quarter of 2013.  The mean investment as a percentage of total sales was also slightly higher than the prior quarter’s 5.4 percent, at 5.7 percent.  Operational spending plans remained high with 75 percent of respondents indicating increased short-term spending in the next 12 months, identical to the second quarter.  Plans for spending on research and development rose significantly to 45 percent, from 34 percent in the first quarter and 38 percent in the second quarter of 2013.  Other areas of investment focus included new product or service introductions (43 percent) and information technology (33 percent).

The Q2 Manufacturing Barometer also indicated a notable rise in plans for M&A spending.  Thirty eight percent of respondents planned M&A activity in the year ahead, compared to 28 percent in the first quarter and 23 percent in the second quarter of 2013.  The majority of that group is focused on purchasing another business, followed by the sale of part/all of their own business or a spin-off.

Among the survey findings, the major headwind to growth over the next 12 months is now seen as legislative/regulatory pressures, rising nine points to 47 percent from a low in the first quarter of 38 percent, but still well below the 53 percent recorded in last year’s second quarter.  Lack of demand was cited as the second leading potential barrier to growth in the next 12 months for 42 percent of respondents.  This was followed by competition from foreign markets and oil/energy prices, which were both cited by 28 percent of respondents.  Conversely, concerns regarding capital constraints dropped to 17 percent of respondents, compared to 28 percent in the first quarter.

To read the full PwC Q2 Manufacturing Barometer, click here.

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