Optimism on the rise for profits, hiring and investment among middle market manufacturers

Regulations present the most significant headwind to growth, but more executives report they are thriving nonetheless.

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Nine out of 10 executives at small and mid-size manufacturing and distribution companies expect solid growth over the next 12 months and two-thirds plan to add jobs during that period, according to the 2014 McGladrey Manufacturing and Distribution Monitor.

The survey, which was conducted by McGladrey LLP, a leading provider of assurance, tax and consulting services focused on the middle market, includes responses from more than 900 executives at small and mid-size U.S. manufacturers and distributors, and provides an annual update on the state of middle-market companies in the industrial sector.

The percentage of companies who report they are thriving is at 36%, up from 31% last year. Those who are “holding their own” is at 60%, meaning the number of companies who are declining has dropped to just 4%.

“We’re seeing companies, especially those that are thriving, continue to invest significantly into information technology,” said Karen Kurek, national industrial products practice leader for McGladrey, in a recent interview. “They’re putting more money into IT, not just enterprise resource planning (ERP), but all up and down their businesses. This includes mobility solutions, websites and other ways for customers to connect to the company and the company to connect to suppliers.”

While an already-healthy majority of executives (69%) reported increases in domestic sales over the past year, 88% expect the next 12 months to bring further growth, with an average projected increase of 8%. In addition, two-thirds (67%) reported that they expect their profit (before taxes and interest) to rise over the next year, with nearly a quarter (24%) expecting increases of more than 10%.

The survey indicates that these expected bottom line improvements will also mean good things for the job market. Two-thirds of respondents (67%) indicated that they expect to hire more employees in the U.S. over the next year, up from 62% in 2013. The average expected increase in U.S. employees was 6%, up from 4% in 2013. Importantly, the number of executives expecting to cut back in U.S. employment dropped to 5% after hovering between 9% and 11% for the past three years.

“This year’s survey suggests that we will be celebrating more than just improved balance sheets over the next twelve months,” Kurek said. “Not only are we seeing a healthy majority of executives planning to turn improved financial results into more jobs, we are seeing a significant drop in the number of companies expecting to cut employees for the first time in several years, suggesting that the influence of the economic downturn may truly be waning.”

The survey also asked executives how important it is to their brands that products are manufactured in the United States. A full 75% said it’s important or very important. “That’s great news,” Kurek said. “In addition, several respondents said that when they make a product in the U.S. and then export it, that fact is positive for their brand and carries a premium across the world.”

As a result, the amount of offshoring has trended downward, while in the past two years about 8% of executives reported they brought some manufacturing back to the U.S. In the next two years, Kurek said, 11% expect to bring manufacturing operations back from overseas.

Despite this positive outlook, executives indicated that they continue to face headwinds that could be holding them back from even further growth. As was the case with last year’s survey findings, regulatory issues topped the list of concerns this year, with 66% of respondents expecting their growth to be limited by regulation over the next year – a concern that is more challenging, according to survey participants, than competition from other companies (63%).

Implementation of the Affordable Care Act (ACA) topped the list of specific regulatory roadblocks, with 69% of executives reporting that they expect it to limit growth over the next year. “But even though executives say they don’t like it, they plan to comply with it,” Kurek said. “What’s interesting about that is there’s a war for talent. People are looking to hire, and while they will continue to offer healthcare where they always did they will also use it to attract talent.”

Other frequently cited regulatory impediments included Environmental Protection Agency rules (50%), state regulation (52%), and the tapering of the federal stimulus program (39%).

In addition to these key business climate trends, the 2014 Monitor provides insights on a wide range of critical issues in the industrial sector. Other important findings in this year’s report include:

• Data Security: Despite countless reports warning businesses to be more proactive with their data security initiatives so they can mitigate any potential breaches, manufacturing and distribution executives still don’t believe their data is at risk – Just over 80% of respondents indicated a risk of level of “2” or “3” on 5-point scale, while 11% reported no risk at all (“1” rating).  When asked why they know that their data is secure, 43% of executives said they believe their companies were not high priorities for data thieves.

• Investments: Concern over the impact of the expiration of business tax incentives such as the R&D tax credit, bonus depreciation and enhanced Section 179 expensing is evident in the survey, which found that 50% or more of the respondents did not intend to increase investment spending in related areas, including physical facilities/warehouses, fleets/vehicles, and research and development.

Infographic source: McGladrey

About the Author

Josh Bond, Contributing Editor
Josh Bond is Senior Editor for Modern, and was formerly Modern’s lift truck columnist and associate editor. He has a degree in Journalism from Keene State College and has studied business management at Franklin Pierce University.

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