Highlights:
- Manufacturing sales fell 2.6% in July — larger than the ~1 1/2% drop expected ahead of the report.
- Weakness was concentrated in an outsized 17% drop in motor vehicle and parts sales — related to summer shutdowns — and a 1.2% drop in prices.
- Sale volumes fell 1.4% overall but increased about a percent excluding the auto component.
- We continue to expect GDP growth slowed in the third quarter, but to a still ‘above-potential’ 2.5% rate.
Our Take:
Canadian manufacturing sales declined a larger-than-expected 2.6% in July but with underlying details that were arguably firmer than expected. The pullback in nominal sales was entirely due to an outsized pullback in motor vehicle sales and lower prices. Auto sales in the U.S. — where most Canadian-made vehicles are sold — have been lower but the 17% drop in manufacturing sales of motor vehicle and parts in July probably had more to do with difficulties seasonally adjusting the data around longer-than-usual summer retooling shutdowns in the sector that were flagged earlier in the export data. Excluding the motor vehicle and parts components, sales rose 0.2% in July and increased about a percent in volume terms.
Risks around the outlook remain, in particular uncertainty about the outcome of NAFTA negotiations and the potential impact of a stronger Canadian dollar on activity in export-intensive sectors like manufacturing. We expect growth in the economy will ultimately remain strong enough to prompt further Bank of Canada rate hikes but with the potential for headwinds to emerge going forward still arguing for a gradual pace.
