Canadian manufacturing sales increased 1.1% in May, bettering market expectations for a 0.8% gain, but came with a downward revision to April sales which increased 0.4% (prev. reported as 1.0%). After accounting for price swings the volume of sales was up an even more impressive 1.1% on the month. But again, this came atop of downward revision to the previous month, where the 0.5% gain was revised to a 0.2% decline.
The gain was entirely due to durables, which advanced 2.2% in May. Amongst durables, it was motor vehicles (+8.6%), motor vehicle parts (+5.7%), miscellaneous mfg. products (+5.7%) and electrical equipment (4.5%) that led the way. On the other hand, nondurables were little changed (-0.3%) as gains in chemicals (+2.4%) and paper (+1.8%) were offset by declines in petroleum & coal products (-3.4%),) and food (-1.2%).
Regionally, manufacturing sales were up in six provinces, led by N.S. (+3.7%), Ontario (+2.6%), B.C. (+1.8%). Shipments increased by 1.3% in both Alberta and N&L, while P.E.I. (-12.9%) and N.B. (-1.7%) exhibited the largest losses.
Inventories were down 0.2% on the month, with the inventory-to-sales ratio down slightly to 1.35. Forward looking indicators were disappointing with new and unfilled orders down 3.6% and 1.5%, respectively in May.
Key Implications
While May marked a good month for Canadian manufacturing, the downward revisions to April’s sales in both value and volume terms have dampened our enthusiasm somewhat. Still, the solid volume print in May suggests healthy activity during the second quarter, with the performance supportive of economic growth which should come in close to 3% during the second quarter.
This performance is not likely to last however. Leading indicators, such as new and unfilled orders, were largely disappointing with both metrics down sharply during the month, although some solace is to be had in industrial production in the U.S. manufacturing and auto sector, which advanced 0.2% and 0.7%, respectively, in June.
Overall, while continued U.S. growth should remain supportive of Canadian manufacturing activity, the recent spike in the loonie’s value on account of tighter monetary policy by the Bank of Canada will likely pose some downside to growth. The sectoral outlook may be further complicated by the upcoming NAFTA renegotiations, with the U.S. Trade Representative publishing rather stringent objectives this week. Discussions will likely begin in mid-August and are likely to last for some time given significant sticking points.
