Manufacturers, Distributors Hurt By Economic Uncertainty Going into 2013

The months of stagnation and uncertainty that preceded January 2013’s tax deal had a negative impact on optimism and growth projections in the manufacturing and distribution industries at the end of 2012, according to newly released data from the McGladrey Manufacturing and Distribution Monitor Update. This pulse survey, conducted by McGladrey LLP, a provider of assurance, tax and consulting services focused on the middle market, provides a post-election update on the state of manufacturers and distributors.

Last year’s annual McGladrey Manufacturing and Distribution Monitor, conducted in the spring of 2012, showed that the vast majority of middle market manufacturers and distributors were generally upbeat about their companies. In that survey, 95 percent of executives reported that they were either thriving or holding steady, and more than 83 percent 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, that optimism has been clearly tempered. By the end of 2012, the number of respondents reporting that their businesses were thriving had dropped to 25 percent, down from 39 percent in the spring of 2012 and 45 percent in 2011. Even more troubling, 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 percent) since the darkest days of the economic crisis in 2009. The number of respondents expressing optimism about their own companies dropped from 83 percent to 70 percent, and those with pessimistic outlooks for their firms rose from 16 percent to 29 percent. 

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 – as contributing factors to the current trend of decline.

“Middle market manufacturers and distributors are approaching 2013 cautiously after a rough end to 2012,” said Karen Kurek, national manufacturing and distribution practice leader for McGladrey. “The results of this year-end survey make clear that these companies remain vulnerable to the volatility and uncertainty that have come to define the post-recession marketplace. While it is still possible that last year’s impasse will have a negative impact on both industries through the beginning of the year, the tax deal reached in early January may 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:

• Less Than Half Now Expect To Add Employees – While  67 percent of respondents reported that they expected to add employees in the spring of 2012, that figure dropped to 41 percent by the end of the year. The percentage of participants expecting a decrease in workforce also rose significantly, from 11 percent in the spring to 21 percent at the end of the year.
• Dramatic Decline In Net Income Projections For The Next 12 Months – After respondents predicted an average increase in net income of 13.1 percent in the spring of 2012, the end-of-year projection dropped to an average of +1.3 percent.
• Significant Drop In Average Projected Increase In U.S. Sales – The  average projected change in U.S. sales fell from +8 percent in the spring 2012 to +2.5 percent at the end of the year. While less severe, the average projected change in non-U.S. sales also fell from +7.2 percent in the spring to +5.7 percent at year’s end.

Not surprisingly, one trend remains consistent with previous Monitor reports: Manufacturing and distribution executives are often more pessimistic about issues that extend beyond their company walls than they are about their own companies.

The McGladrey Manufacturing and Distribution Monitor surveys industry leaders 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. All data is collected online in response to invitations from McGladrey and from partnering associations and chambers of commerce across the United States.