Highlights:
- Manufacturing sales fell 0.4% in August, close to market expectations for a 0.6% decline.
- The slowdown was narrowly-based with 7 of 21 industries seeing declines in August.
- The auto industry usually sees temporary shutdowns for retooling in July, but StatCan noted “atypical” shutdowns were behind lower motor vehicle production in August.
- Sales volumes were down 0.3% in August. We expect a similar decline when translated into monthly GDP. That will do little to retrace a cumulative 2% increase over the prior two months, and should leave manufacturing as a positive contributor to Q3 GDP growth (our forecast at 2.3%).
Our Take:
Manufacturing sales volumes fell as expected in August. The decline largely reflected unusual shutdowns in the motor vehicle sector (already flagged in export data) that should prove transitory. Some offset came from a jump in the volatile aerospace component. Excluding transportation, sales volumes recorded a modest increase with a majority of industries seeing gains. Manufacturing data has been volatile but the underlying trend is one of improvement. The sector saw a nice pickup in activity last year (after a slow 2015-16) and has remained a solid contributor to GDP growth in 2018. That has coincided with a strengthening US manufacturing sector: yesterday’s industrial production data showed manufacturing sales growing at their best year-over-year pace since 2012.
Ongoing strength in the US economy and a stable Canadian dollar should continue to support manufacturers. A significant reduction in trade uncertainty—at least within North America—will also help. But capacity constraints could represent a growing headwind. Capacity utilization in manufacturing is close to cycle highs but still below pre-recession norms. Job vacancies are elevated, and business surveys indicate skilled labour is hard to find. Reduced trade uncertainty, and perhaps some measures to encourage investment in the next federal budget, might spur capacity additions, but labour shortages will likely remain an issue. That could mean the manufacturing sector’s fastest growth is behind us for this cycle.
