U.S. Multinationals Feeling The Pinch.

Leaders of U.S.-based multinationals have turned less optimistic and more uncertain about the future. Many—particularly the 36 percent that see their company as vulnerable to rising oil prices—are scaling back expectations for revenue growth, new jobs, and investments.

A Less-Favorable Outlook

Optimism is slipping; uncertainty is increasing. Although 82 percent of senior executives continue to believe that the U.S. economy is growing, in the second quarter only 62 percent were optimistic about its prospects over the next 12 months—a sharp 15-point drop from the prior quarter. One-third now counts itself uncertain, a 13-point increase.

Declining optimism is most prevalent among 36 percent of executives citing rising oil prices as a potential barrier to their company’s growth. Only 56 percent of this group remains optimistic; 42 percent is uncertain.
Flagging optimism is also being felt by companies that are not oil-vulnerable. Currently, 66 percent of this group continues optimistic, down from 80 percent in the prior quarter.

Fifty-nine percent remain optimistic about the world economy—off eight points—with one-third uncertain.

Revenue growth is slowing. Growth targets have been reduced for the third consecutive quarter. The latest 12-month goal is a 7.2 percent increase, off from 8.1 percent in the prior quarter.

Costs are up, pricing is not keeping pace, and gross margins are softer. Increased costs are reported by 45 percent, but increased pricing by only 37 percent. And, although improving margins are reported by 36 percent (consistent with the prior quarter), there has recently been a narrowing from their strong showing in late 2004.

Purse strings are tightening. Fewer executives are planning major new investments (47 percent, off 12 points from the prior quarter) and net new hiring (46 percent, off 11 points).

“In the second quarter, business leaders saw oil prices cross the $60-a-barrel marker for the first time,” said John O’Connor, vice chairman of PricewaterhouseCoopers LLP. “It remains to be seen whether their reduced growth estimates, capital spending, and hiring plans represent a temporary case of the jitters, or a signal of something more.”

Some Continuing Bright Spots

The level of planned new hiring remains steady. Although fewer multinationals will be adding employees over the next 12 months, an average of 1.2 percent net new hires is expected, comparable to the prior quarter’s estimate. Those hiring expect to increase revenues by 9.5 percent, versus 6.5 percent for all others, or 46 percent faster.

Nearly half plan bigger new investments. Although fewer surveyed companies expect to make major new investments (47 percent, down from 59 percent), they plan to spend more (8.4 percent of revenues, up from 7.0 percent).

Increased investment is expected in several key areas: Information Technology, planned by 49 percent (up seven points quarter-to-quarter); geographic expansion, 40 percent (up four points); business acquisitions, 39 percent (up two points); marketing & sales promotion, 35 percent (up six points); and research and development, 30 percent (up three points).
Concern about demand remains low. Only 27 percent cite demand as a concern for the coming 12 months, up just two points.

Plans for growth through acquisition are up. Fifty-six percent expect to consider M&A-related initiatives over the next 12 months (up 12 points from the prior quarter), especially purchase of another business, cited by 47 percent (up eight points).

“The economy has been resilient, successfully withstanding a number of assaults over the past year, including the tripling of short-term interest rates, and a rallying dollar that now makes U.S. exports more costly abroad,” said O’Connor. “The challenge now, in this increasingly uncertain period, is to adjust to $60-dollar oil, and regain momentum.”

Higher Oil Prices Take Their Toll

U.S.-based multinationals are “paying at the pump” with:

Lower profits. The majority (52 percent) of senior executives report that higher oil prices are having a strong (23 percent) or moderate (29 percent) negative impact on profit margins of companies in their industry.

Slower growth. Thirty-six percent of surveyed leaders see higher oil prices as a prospective barrier to their company’s growth. These oil-vulnerable businesses are projecting an average 5.9 percent revenue increase for the year ahead, versus 7.9 percent for all others—a difference of 25 percent.

Fewer new jobs. Only 35 percent of oil-vulnerable businesses plan net new hiring over the next 12 months, versus 52 percent of all others. Average new hiring is estimated at 0.5 percent of workforce for these companies, versus 1.8 percent for all others.

Fewer and smaller new investments. Only 39 percent of oil-vulnerable businesses plan major new capital investments in the year ahead, versus 51 percent of all others. And, their expected level of spending averages 5.2 percent of revenues, versus 9.7 percent for all others.

“Escalating oil prices have the potential to slow future economic expansion through their impact on profit margins, revenue growth, new hiring, and capital investments,” said O’Connor. “The next several months will be critical as U.S. multinationals attempt to adjust to, and bounce back from the effects of oil’s steadily increasing cost.”

To view charts CLICK below (Adobe Acrobat reader required):

http://www.pwc.com/extweb/ncpressrelease.nsf/84f5f51d361fe04e8525665f00506220/23bf1f48c766f40a8525705e004cd4e4/$FILE/81505%20MB%20charts.pdf

For more information at http://www.pwc.com