The latest edition of thePwC US Manufacturing Barometerreports that despite ongoing uncertainty about the global economy, a vast majority of U.S.industrial manufacturersexpect positive own-company revenue growth for 2011 and the next 12 months. While several key factors including higher costs of raw materials and commodities,oil and energyprices, higher costs of services worldwide and the economic impact ofJapan's earthquake and tsunami have contributed to the uncertainty about the world economy over the past 12 months, U.S.-based industrial manufacturers continued to grow international sales in the second quarter of 2011 and are projecting continued strength for overseas revenues.

"U.S. industrial manufacturers are showing confidence in the strength of their businesses by reporting positive expectations for their company revenue, international sales and gross margins, as well as plans for greater spending, even against a backdrop of building uncertainty for the U.S. and world economies," saidBarry Misthal, U.S. industrial manufacturing leader for PwC. "While several headwinds are expected to grow over the next 12 months, as cited inPwC's latest survey, U.S. industrial manufacturers aren't as concerned about demand over the next 12 months as in past quarters. Furthermore, they are planning major new investments to introduce new products and services, expand their geographic reach and undertake business acquisitions to bolster growth."

The composite average growth estimate for own-company revenue growth in the calendar year rose to 6.3 percent in the second quarter of 2011 from 5.3 percent in the previous quarter, the fifth consecutive quarterly increase and nearly four times higher than the second quarter of 2010. Eighty-eight percent of respondents forecasted positive own-company revenue growth for 2011, an increase of 4 points over the first quarter of 2011 and 23 points over the second quarter of 2010. Of those, 33 percent are forecasting double-digit growth for 2011, which is flat compared to the prior quarter, while 55 percent are forecasting single-digit growth, up 4 points over the prior quarter and 20 points higher than the same time a year ago. Only 8 percent forecast negative growth in the second quarter of 2011, versus 13 percent in the first quarter of 2011 and 20 percent in the second quarter of 2010.

Looking at the next 12 months, 90 percent of those surveyed expect positive revenue growth for their own companies, up a point compared to the first quarter of this year and 17 points higher than the second quarter of 2010. Twenty-eight percent forecast double-digit growth while 62 percent forecast single-digit growth, compared to 33 percent who forecast double-digit growth and 56 percent forecasting single-digit growth in the first quarter of 2011.

Gross margins for the second quarter remained positive. They were higher for 32 percent of respondents and lower for 20 percent, for a net plus 12 percent, which is above the prior quarter's plus 8 percent.

According to the report, industry growth estimates for 2011 rose significantly to 5.4 percent in Q2 from 3.9 percent in the prior quarter of 2011. Eighty-seven percent of panelists expect positive industry growth for 2011, compared to 79 percent in the prior quarter and 65 percent in the second quarter of 2010.

U.S.-based industrial manufacturers that sell abroad continued to grow revenue in the second quarter of 2011, with half of respondents reporting an uptick in sales over the past three months, an 8 point increase over the second quarter of 2010, but down slightly from the prior quarter. Forty-eight percent responded that sales remained the same in the second quarter of 2011. The projected contribution ofinternational salesto total revenue in the next 12 months increased to 36 percent from 34 percent in the prior quarter.

"Nearly every respondent noted that international sales were up or the same compared to three months ago, reinforcing our view that with the right strategies, plans and understanding of the various risks involved in doing business overseas, industrial manufacturers can find robust opportunities to drive revenues in today's global marketplace," added Misthal.

Looking at the next 12 months, 48 percent of industrial manufacturers expressed optimism about the U.S. economy, down 9 points from the first quarter of 2011, but 3 points higher than the same period in 2010. Uncertainty about the U.S. economy was cited by 45 percent of panelists, an increase of 7 points over the first quarter of 2011, while 7 percent remain pessimistic in the second quarter of 2011, an increase of 2 points from the prior quarter. Thirty-eight percent of U.S.-based industrial manufacturers who market abroad are optimistic about the prospects for the world economy over the next 12 months, a decline of 6 points from the prior quarter but flat compared to the same period last year. The majority (55 percent) are uncertain, up slightly from 51 percent, while 7 percent are pessimistic about the global economic outlook.

In the second quarter of 2011, 57 percent of respondents believed the U.S. economy was growing, down from 65 percent in the prior quarter. For the second consecutive time in five years, no panelist believed it was declining. Forty-three percent believed the U.S. economy did not change from last quarter, an increase of 8 percent over the first quarter.

Over the next 12 months, more than half of panelists (52 percent) are planning major new investments of capital, an increase of 3 points over last quarter and 19 points higher than the same period last year. The increase marks the sixth straight quarterly increase in spending projections. Operational spending is also expected to increase, with 88 percent planning an increase, up from 86 percent in the fourth quarter of 2010 and 80 percent in the second quarter of 2010. Operational spending plans are led by new product or service introductions, which was cited by 60 percent, an increase of 11 points over the prior quarter. This was followed by an expected increase in spending on information technology (48 percent), business acquisitions (45 percent) and geographic expansion (43 percent).

Seventy-three percent of respondents expect to participate in new business initiatives, with 45 percent planningmerger and acquisition (M&A) activityover the next 12 months, an increase over the prior quarter of 9 points and 4 points, respectively. This M&A activity response was the highest rate in four years and was ranked equally with planning to expand to new markets abroad, which increased from 33 percent in the prior quarter. Plans for new facilities abroad rose 13 points to 35 percent while plans for joint ventures (38 percent) also rose.

Fifty-two percent of respondents plan to add employees to theirworkforceover the next 12 months, up slightly from the first quarter of 2011 and 5 points higher than the same period last year. The percentage of participants who are planning a net reduction stayed the same as the second quarter of 2010 at 7 percent but increased from 3 percent in the prior quarter.

"With concerns that the U.S. economy may have stalled in the second quarter of this year and a number of barriers being cited that have the potential to limit growth in 2011, industrial manufacturers are looking to the M&A market to fuel growth," continued Misthal. "The right deals can not only add scale but build efficiencies and help businesses gain access to new markets."

Concern over oil and energy prices contributed to 70 percent of panelists citing this as the greatest potential barrier to business growth over the next 12 months, rising 5 points from the prior quarter. Oil and energy price concerns outweighed legislative and regulatory pressures, which was cited by 60 percent versus 54 percent in the first quarter of 2011. Taxation policies showed the biggest increase over the prior quarter, up 20 points to 53 percent. Concerns about demand continued to decline for the third consecutive quarter to 40 percent. A third of the panel (33 percent) cited decreasing profitability, up 11 points from the prior quarter.

In the second quarter of 2011, 33 percent of U.S.-based industrial manufacturers reported higher costs, and 8 percent reported lower costs for a net plus 25 percent. This compares to the prior quarter when a majority (51 percent) of U.S.-based industrial manufacturers reported higher costs, and 8 percent reported lower costs for a net plus 43 percent. In the second quarter of 2011, 28 percent raised prices and only 7 percent lowered them, for a net plus of 21 percent. This compares to the prior quarter when 43 percent raised prices, and only 11 percent lowered them, for a net of plus 32 percent.

"As rising commodity costs continue to pressure the bottom lines of U.S. industrial manufacturers, there is an obvious need for companies to look at their currentoperational effectivenessandcost managementprograms," added Misthal. "Stronger, updated programs that reflect the current environment of higher commodity costs can uncover real opportunities to make business adjustments that offset these challenges."

Japanese Disruption and Impact on Affected Companies

Overall, 70 percent of U.S. industrial manufactures either sell inJapan(67 percent) or manufacture inJapan(30 percent). Nearly half (47 percent) of U.S. industrial manufactures surveyed responded that their company has been directly affected or expects to be affected over the next 12 months by the Japanese earthquake, tsunami and nuclear fallout. Overall, the impact on these 47 percent of industrial manufactures was cited as severe by 11 percent and moderate by 32 percent. A production disruption insideJapanwas cited by 50 percent and outside ofJapanby the same 50 percent, while a sales disruption inJapanwas cited by 57 percent and outsideJapanby 43 percent. Thirty-nine percent of panelists noted an overall revenue drop off from these events.

The disruptive events inJapancaused panelist companies to examine their own worldwide business continuity plans forsupply chains(40 percent) and foroperationsat company sites near a nuclear plant or in earthquake zones (32 percent). "One time events like the tragic situation inJapanhave ramifications that extend across business communities as well," said Misthal. "We're seeing more companies look at their own worldwide business continuity plans for supply chains and the geographical risk of their operations."