U.S. manufacturing executives will use what they perceive as a pause in the economic growth cycle to prepare for the future, expressing a firmer commitment to spending on capital improvements and manufacturing research and development (R&D) in 2012, according to KPMG International's latest Global Business Outlook survey. 

These same executives, who in the spring had broadly anticipated improved business activity in the year ahead, now expect a stagnant market during the period, and sentiment in the U.S. service sector also continued a downward trend.    

Manufacturing: In the latest KPMG poll conducted in October, just half of the manufacturing executives said activity would rise, compared with June when 71 percent of them expected better business activity, up from a relatively strong 68 percent in February.

Globally, however, expectations for higher business activities continued dropping, to 42 percent of manufacturing respondents in October, compared with 55 percent in June and 61 percent in February.

Service: In the service sector, expectations that previous polls already showed were low have eased yet again. Fifty-five percent of U.S. service industry executives polled in October said they expected improved business activity, compared with almost 58 percent in June and a stronger 66 percent in February. Globally, just 44 percent of service executives polled in October expected improved activity, compared with 48 percent in June and 55 percent in February.

"KPMG's survey findings underscore the 'wait-and-see' mood that has taken over this market of unprecedented uncertainty," saidLynne M. Doughtie, vice chair – Advisory for KPMG LLP, the U.S. audit, tax and advisory firm. "However, we are finding many of our clients planning and making investments in their core infrastructure, and the survey reveals more manufacturing organizations are maintaining levels of research and development."

Doughtie pointed out that while the number of U.S. manufacturing executives expecting higher R&D investment slipped slightly to 18 percent from 20 percent in June and 29 percent in February, the number who expected the steady levels of research rose to 68 percent, from 57 percent in June and 53 percent in February. Those who expected lowered R&D spending has held steady at about 5 percent throughout 2011. In addition, capital investments may experience a slight pull-back in the manufacturing sector, while remaining somewhat steady among service organizations, the study said.

Among U.S. manufacturing executives, more than 60 percent expect continued levels of capital spending in the coming 12 months, compared with 56 percent in June and 51 percent in February. Those who expected higher spending dropped only slightly to 19 percent in October, compared with 22 percent in June and a much stronger 31 percent in February.  The KPMG survey found that 9 percent of U.S. manufacturing executives anticipate lower capital spending during the period, up from just under 6 percent in June.

The October survey findings showed little change from June among U.S. service sector respondents in their expectations for capital spending. Responses were unchanged among those who said spending would rise in the coming 12 months (23 percent) or remain the same (61 percent), while those who believe spending would drop rose by less than 1 percent to 13 percent.

"As the market meanders along, many companies are looking at how to invest idle cash in a way that will pay future dividends," said Doughtie. "We're seeing many that are upgrading IT systems, while everyone is monitoring the regulatory environment and working to improve their compliance programs to be sure they understand new rules of the road.

"In addition, companies have an eye on how to transform their organizations with a focus on new business models, leveraging potential new markets, enhancing their portfolio of products and services, and shopping for acquisitions to continue their growth as the market finds its footing," said Doughtie.

KPMG's survey showed more U.S. executives expecting little change across a number of areas indicators measured:

• Manufacturing
  • R&D: The uncertainty of spending on research and development is dissipating. Eighty-six percent of survey respondents expect R&D spending in the coming year to be higher or remain the same, compared with 75 percent in June.. More sure footing on R&D expectations becomes evident as just 9 percent of executives surveyed said they did not know what R&D spending would be, less than half the nearly 20 percent of survey respondents in June who said they didn't know how spending would play out. 
  • Capital Expenditure: Likewise, the number of executives who said they were unsure about spending levels in June (16 percent) dropped to just 12 percent in October, while more than 60 percent of executives expect steady levels of capital spending in the next 12 months, up four points from 56 percent in June . More than 19 percent of respondents said they expect higher spending on capital expenditure in the next year, off marginally from 22 percent in June.
  • Revenue: Expectations for higher business revenues dropped to 49 percent of manufacturing executives polled in October, compared with 68 percent in June.
  • New Business: Almost 49 percent of executives expect improvements in new business in the coming 12 months, compared with 66 percent in June.
  • Profits: Just 43 percent of executives expect higher profits in the next year; 64 percent of those executives polled in June thought profits would be higher in 2012.
  • Employment: Almost 30 percent of executives polled said they would be hiring more workers in the coming 12 months, compared with 36 percent of those polled in June who expected bigger payrolls.

• Services
  • Capital Expenditure: Spending will remain relatively unchanged in the coming year, according to survey respondents. Twenty-three percent of service sector executives expect higher spending, unchanged since February, while 61 percent expect the same level of investment unchanged from June, but up from 57 percent in February, and 13 percent expect lower spending, up slightly from 12 percent in June to the same level as in February.
  • Revenue: Nearly 52 percent of Service sector leaders expect higher revenue in the coming 12 months, down slightly from almost 58 percent in June.
  • New Business: Fifty-two percent of executives polled expect higher revenue during the coming period, down from 55 percent in June.
  • Profits: Higher profits were anticipated by just 47 percent of respondents, down from 53 percent in June.
  • Employment: Expectations for payroll also declined, from 31 percent of executives in June anticipating an increase in hiring to 27 percent in October.

"Although there is not much upside in the sentiment of both manufacturing and service sector leaders, most see the market changing very little over the next twelve months, with only a slight uptick in those who believe their key indicators will fall in the year ahead," said Doughtie.