Canadian manufacturing sales fell 1.8% in June, worse than the 1.0% decline expected by the markets. But, the decline came atop of positive revisions to the previous month, which is now reported as 1.3% gain (prev. 1.1%). After accounting for price changes the volume of sales was down by a less severe 1.0% on the month. But again, this came atop of upward revision to the previous month, where the 1.1% gain was revised to a 1.2% increase.
Both durables and nondurables contributed to the decline. Non-durables declined 2.2% as petroleum (-7.1%) and chemicals (-4.5%) experienced large declines. Durables fell 1.5% as declines in wood (-2.9%), transport equipment (-2.3%), and primary metals (-2.3%) more than offset gains in electronics (+2.3%) and machinery (+1.8%).
Regionally, manufacturing sales were down in all provinces but for Manitoba (+6.0%) and B.C. (+0.9%). Declines were particularly pronounced in energy producing Newfoundland (-13.5%), Alberta (-2.0%), and Saskatchewan (-1.9%), but the manufacturing-heavy Quebec (-3.3%) and Ontario (-1.7%) also saw sizeable declines.
Inventories were down 0.2% on the month, with the inventory-to-sales ratio up slightly to 1.36 on the weakness in shipments. Forward looking indicators were very disappointing with new and unfilled orders down 3.0% and 2.1%, respectively in June.
Key Implications
After several strong months the Canadian manufacturing sector hit a speedbump in June with sizeable declines in both value and volume terms made only slightly more palatable by the upward revisions to the previous month. The June report does not alter our view of second quarter performance, with GDP still on track to expand by about 3.7%, but suggests that a marked deceleration of growth in Q3 in in the cards.
The theme of weakness in the third-quarter (and beyond) is corroborated by the forward looking indicators with both new and unfilled orders pulling back sharply on the month. To make matters worse, this morning’s U.S. industrial production report indicated that manufacturing activity south of the border declined of 0.1% in July.
Still, we expect U.S. economic growth to be generally supportive for Canadian manufacturing activity going forward. However, this support will be somewhat offset by a higher loonie which is unlikely to pare back its recent gains too much in light of expected continued tightening of monetary policy by the Bank of Canada. Having said that, the medium-term outlook for the sector remains highly uncertain given recently begun renegotiations of the North American Free Trade Agreement – with the first round of discussions taking place today.
