The latest edition of the PricewaterhouseCoopers LLP Manufacturing Barometer reports that optimism in the U.S. and global economies among U.S.-based industrial manufacturers is on the rise and a turnaround is expected over the next 12 months, according to the third-quarter report. While a majority of survey respondents continue to view the U.S. and global economies as unchanged or declining in the third quarter of 2009, their overall outlook on how things will be by the second half of 2010 indicates their overall optimism on recession recovery.

For the past four quarters, an overwhelming majority of respondents viewed the economy as declining. In a turnaround this quarter, fewer industrial manufacturers are taking this view, with only 23 percent of industrial manufacturers interviewed believing the U.S. economy declined this quarter (down 40 points from last quarter's 63 percent). Also showing a hint of optimism, 13 percent believed the U.S. economy actually grew. On the world economy, only 25 percent continued to view it as declining, down 41 points from last quarter. Additionally, 29 percent view the world economy as growing, up 18 points over last quarter's findings.

The overall outlook for the next 12 months shows a marked improvement in optimism. Looking ahead, 48 percent are optimistic about the U.S. economy's prospects and only 13 percent are pessimistic. This marks a decrease in pessimism over this time last year when 66 percent of respondents were pessimistic. Similarly, among those respondents doing business abroad, 45 percent of panelists are now optimistic about prospects for the world economy and only 13 percent are pessimistic. This is a stark contrast to what we saw a year ago, when 63 percent of these respondents were pessimistic about the world economy over the next 12 months.

"The upswing of optimism regarding the economy reflects an important shift in perspective and growing confidence by manufacturing executives at both a U.S. and global level," said Barry Misthal, partner and industrial manufacturing sector leader at PricewaterhouseCoopers. "The improving hiring plans over the next 12 months, as well as for M&A activity and other major new investments of capital, are evidence of the industry's growing hope in an economic turnaround."

Looking ahead at the next 12 months, 57 percent of panelists expect positive growth, with 12 percent forecasting double-digit growth, and 45 percent forecasting single-digit growth. The projected average growth rate is a plus 2.2 percent, notably better than the prior quarter's projected minus 0.4 percent.

Although concern about market demand remained the chief barrier to growth over the next 12 months (75 percent, down 7 points), two other potential barriers rose sharply in Q3 - concern about legislative/regulatory pressures (58 percent, up 16 points) and taxation policies (53 percent, up 10 points). Decreasing profitability fears lessened slightly to 42 percent (down 8 points), although still high. On the positive side, capital constraints dropped off sharply to 22 percent as a potential barrier for growth over the next 12 months.

Plans for major new investments of capital over the next 12 months were notably higher at 37 percent, a jump over last quarter's 27 percent and slightly above last year's 34 percent. However, the level of projected spending dropped sharply from 6.2 percent to 3.9 percent of sales, indicating that while more are planning new capital investments, spending will take place at a lower rate than before. Looking at the next 12 months, over two-thirds of respondents (68 percent) plan to increase operational spending, rising 15 points over last quarter's 53 percent. The areas in which respondents anticipate focusing increased budget expenditures include new product or service introductions (40 percent), research and development (35 percent) and business acquisitions (33 percent).

Industrial manufacturers planning for M&A activity over the next 12 months also rose sharply to 38 percent, focused primarily on intent to purchase another business. New strategic alliances remained high, as well (33 percent). Interestingly, plans to expand to new markets abroad dropped 12 points this quarter to 15 percent.

While workforce reductions are still expected over the next 12 months, plans to hire have increased, and the rate of layoffs is notably lower compared with last quarter. Over the next 12 months, 25 percent of respondents plan to add workers (up 8 points from last quarter and more than double last year's 12 percent). Of the 25 percent planning to hire, the most sought-after employees will be professionals/technicians, white collar workers, and sales/marketing people. Twenty-eight percent of respondents plan to reduce the number of full-time employees, marking a 2-point dip from last quarter, and 47 percent expect to stay about the same.

In Q3, international sales for U.S.-based industrial manufacturers selling abroad showed a slight improvement, as well. Panelists marketing abroad forecast an upturn in the contribution of international sales to total revenue over the next 12 months, up 4 points to 34 percent from the prior quarter's survey low of 30 percent. However, the 22 percent that reported an increase in sales abroad represent a lower number compared with a year ago (45 percent). The number reporting a decrease fell to 39 percent from 47 percent in the prior quarter.

The survey also found that 40 percent of panelists reported gross margins up and 25 percent reported them down - a net 15 percent with higher margins. This figure marks the first positive net change since fourth quarter 2007 and a reversal of last quarter when a net 22 percent reported lower margins. Costs and prices remained lower as well in Q3 2009, with only 15 percent of U.S.-based industrial manufacturers reporting higher costs, while 43 percent reported lower costs. On the pricing side, only 17 percent raised prices, compared to the 27 percent that lowered them.