Canadian manufacturing sales retreated in August, falling 0.4% following last month’s upwardly revised 1.2% (previously reported as 0.9%). The release comes slightly better than expectations for a decline of 0.6%. After accounting for price changes, volumes were also down a modest 0.3%.
Durable goods led the pullback, falling 1.2%. This was mostly driven by a slump in motor vehicle sales (-8.3%) and railroad rolling stock (-10.9%). Aeropsace product sales provided some offset, increasing 13.5% and resulting in a less-severe 2.4% contraction in the overall transportation equipment sector. Primary metals also fell for the third consecutive month, down 2.9%. In contrast, machinery sales went up 2%.
Non-durable goods fared better, increasing 0.5% on the back of higher chemicals (1.1%) and plastics and rubber products (3.8%) sales.
Regionally, declines were mostly driven by Ontario (-2%), as expected given the sharp pullback in auto sales. Alberta (-0.8%) and Nova Scotia (-2.3%) also saw declines, whereas the remaining seven provinces saw manufacturing sales rise on the month.
Inventories increased 1.1%, continuing their upward trend once again, whereas the inventory-to-sales ratio also moved up to 1.43. Forward looking indicators were generally positive, with new orders up 1.1% and unfilled orders up 0.8%.
Key Implications
The release came in as expected, with autos driving most of the headline decline. After the second quarter’s impressive performance and an unexpectedly strong July print, this shouldn’t be a cause for concern. On the flip side, excluding autos, today’s report paints a healthy picture of manufacturing growth, with 14 of 21 industries advancing and with the ex-auto sales print moving up 0.5%. Moreover, Statistics Canada cited “atypical” shutdowns as being a factor in the autos slump – suggesting that some of the decline is transitory.
We continue to expect moderate growth going forward, but this week’s Business Outlook release adds some optimism to Canada’s manufacturing (and general business) outlook, with signs of increasing investment on the back of rising domestic and U.S. demand and growing capacity constraints.
Looking ahead, strong growth indicators in the second quarter have provided sufficient conviction thus far for a Bank of Canada rate hike next Wednesday. Following the USMCA agreement at the end of last month, a major cloud of uncertainty has been lifted for the data-driven Bank of Canada, which adds the potential for a follow up rate hike in the beginning of 2019.
