KPMG recently announced results of its latest international business survey that included responses from more than 6,000 global executives. U.S. manufacturers communicated a decidedly more positive viewpoint than many other survey participants. KPMG LLP partner Jeff Dobbs analyzes the survey findings.
Like an object in the rear view mirror, economic recovery may be closer than it appears, according to the results of a recent KPMG Global Business Outlook survey that found U.S. executives showing increased optimism about the future.
KPMG International recently conducted a comprehensive survey on the economy, obtaining responses from 6,200 corporate leaders on their outlook for the next 12 months. Respondents included 322 U.S. manufacturing executives, and their observations proved especially interesting on a number of fronts including:
- Optimism – U.S. manufacturing executives expressed stronger optimism for improved business activity over the next 12 months, compared with their European counterparts, who anticipate stagnant or even worsening conditions.
- Business Activity – Optimism continued to grow among U.S. manufacturing executives, 73 percent of whom said business activity would be higher in the coming 12 months, up from 71 percent in February and 65 percent last October. Conversely, less than four percent said activity would be lower, down again from nearly five percent in February and almost 11 percent in October. Globally, 60 percent of manufacturing executives expected improvement, down slightly from 61 percent in February but still higher than October’s 57 percent.
- Employment – U.S. manufacturing executives indicated a significant expected rise in employment, from 34 percent in February to more than 45 percent in the current survey; 40 percent said it would remain unchanged, and less than five percent said it would be lower, compared with more than six percent in February and as much as 12 percent expecting lower employment back in October.
- Business Revenue – Seventy percent of U.S. manufacturing executives believe revenue will rise in the coming 12-month period, up from 67 percent in February and 62 percent in October; meanwhile, only three percent said revenues would be lower, down from six percent in February and 12 percent in the October polling.
- Profit – Almost 67 percent of U.S. manufacturing executives expect higher profits in the coming 12 months, up from 63 percent in February and 60 percent last October. Only three percent expect lower profits, down from six percent in February and 14 percent in October.
Comparing the responses from the manufacturing executives to those from the service businesses, manufacturing execs hold a more confident outlook on almost every measure. For example, 73 percent expect higher business activity, compared to 65 percent of the service sector. Also, 70 percent of manufacturers expect higher revenue, compared to 64 percent of the service sector, and the profit outlook is also higher in manufacturing – 67 percent versus 61 percent.
Of course, when looking at the overall global survey findings, there’s no question that overall U.S. sentiment is significantly more upbeat compared against the low-water marks set as the economy reached bottom during 2009. It appears that stimulus funding has helped the economic engine keep running, but a greater sign for recovery is that U.S. executives are seeing signs of increases in business, profitability and hiring.
European Union and the BRICs
Optimism remains the order of the day across the high-growth BRIC (Brazil, Russia, India and China) markets, but the stalling of growth in the optimism levels in Brazil, Russia and China suggests a hint of nervousness creeping in. This can be traced back to inflationary concerns caused by rising energy costs and wages, although this is less noticeable in Brazil and Russia, where there’s more control over energy costs.
Yet, while overall confidence in the BRIC nations has declined, it may be as a direct response to government measures to rein in super-charged economies. BRIC nations are not nearly struggling as much with market volatility or other external factors as their European counterparts.
Drops in corporate sentiment in China may also suggest a growing level of concern over when exports to the United States and Europe will pick up. These numbers also hint at worries over how to stimulate domestic demand now that government spending, which has been behind much of that demand previously, is on the retreat.
While global factors will affect every region’s ability to bounce back from the recent economic downturn, companies with U.S. operations will be encouraged to see a steady upward trend in the prognostications of U.S. executives, especially in the manufacturing sector, as that industry has the historical importance in driving an initial recovery.
Transformation as a Competitive Advantage
Chief Executive Officers are now looking at how they can continue to transform their business models to better compete in a new global market place. Whether through acquisition, strategic divestitures, or a new focus on aligning supply chains with strategy, U.S. manufacturers may choose to use this as an opportunity to gain a competitive advantage. CEOs are also re-evaluating their risk management procedures to ensure they are aligned to a new regulatory environment both inside and outside of the United States.
As the recovery takes hold, manufacturing companies also face challenges brought on by new marketplace trends. Some of these include:
- New regulations and uncertainty about the legislative and regulatory environment
- New view of risk requiring enhancements and, in some cases, a complete re-tooling of risk management activities
- Business models that don’t align with today’s market realities, requiring significant transformations .
A great example of a transformational issue is the evolving adoption of Cloud-based activities – not just Cloud computing, but moving the entire organization into a Cloud strategy, which is truly transformative and is much more than an IT story. The virtualization of business processes will not only change traditional IT delivery, it will provide new options for organizations to dramatically improve or transform their businesses.
With stronger optimism around capital expenditures and employment, combined with many businesses sitting on cash reserves, there is hope that businesses will spark sustained positive momentum by translating their confidence into greater investment. Until that happens though, this prevailing optimism could keep the economy idling rather than in the fast lane. As history shows, manufacturers should lead the way out of a recession if they use excess cash reserves to make capital investments in their companies, to increase capacity and payrolls.
Jeff Dobbs is a partner with KPMG LLP, the U.S. member firm of KPMG International, and he is the global head of the firm’s Diversified Industrial practice. He can be reached at firstname.lastname@example.org.
KPMG is a global network of professional firms providing audit, tax and advisory services. It operates in 146 countries and has 140,000 people working in member firms around the world. Independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG LLP (www.us.kpmg.com) is the U.S. member firm.
Views and opinions expressed are those of the author and do not necessarily represent those of KPMG LLP. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.