Report shows confidence inside the four walls, increased concern everywhere else

Although U.S. manufacturers and distributors are increasingly optimistic about their own businesses, many are deeply troubled by domestic and global economic conditions. These are among the findings in a new report titled the The McGladrey Manufacturing and Distribution Monitor. The report surveyed middle-market manufacturing and distribution executives and aims to provide a unique look into the state of manufacturing on “Main Street.”

Karen Kurek is national manufacturing practice leader for McGladrey LLP, the fifth largest U.S. provider of assurance, tax and consulting services. In a recent interview, Kurek said the continued recession in Europe and the looming expiration of the 2001 and 2003 tax cuts are hindering confidence and growth. “If the fiscal cliffs happen, budget cuts will go to the discretionary expenses and we could go into a recession in 2013,” she said. “If it is addressed, I think we’ll continue to see modest growth of about 2% GDP. Manufacturers and distributors are still expecting sales growth, albeit at slower rates.”

Kurek cited the Institute for Supply Chain Management‘s Purchasing Managers Index, a measurement of manufacturing activity which, after more than a year of monthly growth has slipped in recent months to levels not seen since July of 2009. In 2012, less than half (46.7%) of the McGladrey report’s 924 respondents report having an optimistic outlook on the U.S. economy, down from 62% in the spring of 2011. Confidence in the world economy has plummeted, as well, with only 16.9% of respondents reporting some optimism about the world economy – down from 50% in the spring.

Part of the reason the fiscal cliff is of particular interest to the survey’s respondents, said Kurek, is that many are organized as pass-through entities like corporations and LLCs. As such they are taxed on individual rates, she said, which are slated to go up at the end of the year. “That will have a direct impact on the amount of money those individuals will have to reinvest in their businesses.”

The survey revealed that nearly three quarters of all respondents (73.7%) reported that the expiration of the Bush era income tax rates would do some harm to their business, with nearly half (48.3%) reporting that it would do moderate or major harm. Similar expectations were found when respondents were asked about the potential harm created by the expiration of capital gains tax rates (64.7%) and the bonus depreciation credit (69.3%).

Kurek said the number of companies reporting that they are “thriving” is 39%, a 6% decrease since 2011. Still, companies are also investing more funds into operational improvements. “We know that that is having positive impacts on their business,” she said. Of “thriving” businesses, 78% reported they were planning to increase investments over the next 12 months, as compared to only 61% of those that were “holding their own” and 45% of “declining” businesses.

Companies are primarily investing in production and operation improvements, followed by inventory management, sales and marketing and information technology. Of manufacturers, 93% reported they were lowering costs through operational efficiencies – by far the most common answer of all choices in the survey. The second most common choice also highlighted efforts to improve process; 57% of manufacturers said they were working with suppliers and/or customers to improve their processes and costs.

Planned capital expenses for the coming year are up 12% overall, she said, and 15% in manufacturing alone. “Much of this money is going to IT infrastructure,” she said. “In recent years companies were hesitant to invest in IT infrastructure. Now they a couple profitable years under their belts, they have cash, and they have the ability to borrow at very low rates.”

Improvements in information technology might also shore up data security among mid-sized businesses, said Kurek. When asked whether they believed their companies’ data is at risk, 77% of respondents said they do not. The survey asked on scale of 1 (low) to 5 (high), do you feel your data is at risk? “Most of these companies are in the middle market and don’t feel they would be a target for technology-based criminal activity, when if fact they are, especially because they might not have the most robust firewalls or disaster recovery plans.”
More survey results:
-83% of middle market manufacturers and distributors are optimistic about conditions for their own businesses.
-70% of businesses reported that process improvements were a factor that most improved productivity.
-63% reported that they expect to increase spending on information technology within the next 12 months. This includes nearly 20% who said they would increase IT spending by more than 11%.
-Companies are increasing employment in areas that reflect their commitment to becoming more advanced, leaner and adaptive companies, including engineering (41.2 %), research and development (21.6%) and IT (16.6%).
-41% of businesses report that they find the skilled talent they require only rarely or some of the time.
-71% of businesses reported using internal training and skills-development programs, while 31% reported collaborating with colleges and universities, and 31% with vocational/technical skills institutions.

Survey methodology:
The McGladrey Manufacturing and Distribution Monitor surveys industry leaders of manufacturing and distribution organizations to assess the current state of the industry and to determine what steps CEOs, CFOs and other executives are taking to grow their businesses and stay competitive. The Monitor was conducted using an online questionnaire promoted by McGladrey LLP and various industrial associations to principally U.S.-based manufacturing and distribution organizations. There were 924 total valid respondents to the Monitor, which consisted of 554 manufacturers and 370 distributors. Responses were submitted in May and June 2012.