Following two months of gains, Canadian manufacturing sales slid 0.4% in October. In real terms, the picture was worse, as sales volumes were down 1.5% during the month.
The bulk of the decline stemmed from the motor vehicle industry (-6.7%), which saw volumes fall 7.6% thanks to assembly plant shutdowns during the month. Several industries provided some offset, including petroleum and coal products (+2.2%), fabricated metal products (+2.6%), computer electronic products (+3.9%) and wood products (+3.4%).
Regionally, sales were down in six provinces. Ontario recorded a 2.2% drop due in large part to the auto industry. On the flipside, sales in Alberta (+4.2%) and B.C. (+2.1%) were up during the month.
The inventory-to-sales ratio increased to 1.40 in October (previously 1.37) thanks to a 1.6% increase in inventories.
Forward looking indicators were encouraging, with unfilled orders up 2.4% and new orders rising 5.3%.
Key Implications
Manufacturing volumes were held back in October by disruptions in the auto sector, which have since been resolved. As such, auto manufacturing should bounce back strongly over the remainder of 2018, helping to lift overall output in the sector.
Outside the auto sector, forward looking indicators point to a better performance in the coming months. Moreover, with economic activity in the U.S. expected to pick up, demand for Canadian-made goods should follow suit, supporting factory production in Canada.
As such, manufacturing should contribute to another strong performance from the Canadian economy in the fourth quarter – which we expect to come in around 3.0% (annualized) – and over the next year. This momentum will not be lost on the Bank of Canada which is in data dependent mode. As such, higher interest rates are on the way, with a hike likely in early-2018.
