Canadian manufacturing sales fell again in July, down 2.6% month-on-month. While the price of goods sold was down, so too was the volume of goods, which fell 1.4% in July. Data for the prior months was also revised slightly lower with today’s release.
Both durable and non-durable goods output fell, but it was the durable goods sector that led the way, down 4.6% on the month. This pullback was down largely due to the transportation equipment sector, which saw output fall 13.8%. Statistics Canada reported that this was the result of summer shutdowns at vehicle assembly plants that were longer and more concentrated in July than is typical. (It is normal for these operations to shut down for retooling, and Statistics Canada’s seasonal adjustment attempts to correct for the ‘typical’ summer shutdown).
Regionally, Ontario (-6.1%) had the largest impact on the headline figure, consistent with the vehicle assembly impacts. However, the remaining provinces saw generally weak performances as well, with only Nova Scotia, Quebec, and Saskatchewan reporting gains in July.
Inventories ticked down just a notch (-0.2%), which was outpaced by the overall decline in sales, leaving the inventory-to-sales ratio at 1.40 in July (from 1.37 in June). Forward looking indicators were not encouraging, as unfilled orders fell for a third month (-1.7%). New orders also saw a decline of (1.7%), driven by the motor vehicle and aerospace industries.
Key Implications
The July manufacturing output data was less than encouraging, to put it mildly. The second month of declines in both value and volumes suggests that momentum may be fading somewhat at Canadian factories. To be sure, with a shift in the shutdown schedule at auto plants contributing significantly to the pullback, a rebound may be in store next month as these assembly lines come back to life. But with the forward-looking indicators down again in July, rebound expectations should be tempered.
Indeed, the weakness of the past few months looks significant enough to impact the overall growth figures. While the overall growth momentum into the third quarter was solid, today’s report takes some wind out of the sails, and pushed the tracking a touch lower, to a still above-trend 2.3%.
For the data-dependent Bank of Canada, today’s report will not be encouraging, but nor is it likely to hold too much weight. Yesterday’s speech by Deputy Governor Tim Lane emphasized the desire to assess how the July and September interest rate increases are affecting the economy. Given the noise of the data and that it likely only partially reflects the first rate increase, we expect that it will be later data that will play a bigger role in their decision making.
