Survey update shows manufacturers, distributors hurt by economic uncertainty going into 2013

An update to a survey conducted in spring of 2012 by McGladrey, a leading provider of assurance, tax and consulting services, indicates respondents’ optimism in their companies and the economy has fallen sharply.

In an effort to gauge the “temperature” of respondents following the presidential election and fiscal cliff negotiations, McGladrey re-fielded a handful of questions in January from the annual McGladrey Manufacturing and Distribution Monitor, the full version of which contains more than 40 survey questions. In the spring of 2012, the full survey produced 924 responses and showed that the vast majority of middle market manufacturers and distributors were generally upbeat about their companies. In that survey, 95% of executives reported that they were either thriving or holding steady, and more than 83% reported a positive outlook for the year ahead. A majority of executives also predicted healthy increases on key performance indicators, including U.S. sales, non-U.S. sales, net income and employment.

Less than a year later, among 275 respondents to the January update survey, the number reporting that their businesses were thriving had dropped to 25%, down from 39% in the spring of 2012 and 45% in 2011. In addition, the number of companies reporting they were in a state of decline more than doubled since the spring of 2012 – reaching its highest level (12%) since the darkest days of the economic crisis in 2009. The number of respondents expressing optimism about their own companies dropped from 83% to 70%, and those with pessimistic outlooks for their firms rose from 16% to 29%. 

Many survey participants said that uncertainty about the tax code and fiscal issues had a negative impact on their companies, consumer confidence and the business environment in general. Others identified more conventional business factors such as limited capital, talent shortage, and volatile material and component prices.

According to Karen Kurek, national manufacturing and distribution practice leader for McGladrey, the resolution of the tax code uncertainty—an increase in individual tax rates for incomes over $450,000—didn’t help the moods of many middle market manufacturers, 70% of which file as individuals.

Some of the uncertainty was resolved, but that was not a good answer for those individuals,” she said in a recent interview. “Middle market manufacturers and distributors are approaching 2013 cautiously after a rough end to 2012.” Kurek said she was hopeful the tax deal reached in early January might help restore confidence and spur investment in innovation, specifically related to the R&D tax credit renewal. 

While most executives expect some upward movement in key metrics such as net revenue and domestic sales, the percentage of executives expecting increases – and the size of their projected increases – across all key performance indicators tracked by the survey are down significantly. These include:
• 41% of respondents reported that they expect to add employees, down from 67% in the spring of 2012, and 56% in the spring of 2011.
• 21% expect a decrease in workforce, up from 11% in 2012.
• Respondents predicted an average increase in net income of +1.3%, down from +13.1% in 2012.
• The average projected change in U.S. sales fell from +8% in spring 2012 to +2.5%.
• The average projected change in non-U.S. sales also fell from +7.2% in the spring to +5.7% at year’s end.
• 32% expressed optimism in the U.S. economy, down from 47% in 2012 and 62% in 2011.
• 20% expressed optimism in the world economy, up from 17% in 2012 and 50% in 2011.

“Concern about the world economy has sort of bottomed out in the manufacturing space, and it’s now one of the places where manufacturers feel a little more confident,” said Kurek. “Looking forward, they believe things will get better in Europe and again heat up in China and Asia. Those companies that are exporting believe that will also fuel some growth in 2013.”

Kurek said the gradual recovery of the housing market is a positive sign, since consumer confidence tends to move accordingly. She also pointed to historically low interest rates as being conducive to equipment and information technology investments. Lastly, developments in shale oil and a downward trending of energy costs could contribute to manufacturing growth.

The next full McGladrey Manufacturing and Distribution Monitor will be fielded in March 2013.