Canadian manufacturing sales dipped 0.3% lower in December – the opposite of the 0.3% gain expected by markets. After accounting for price changes the volume of sales was down by a less severe 0.1% on the month. Revisions were mixed. The prior month was revised up, with nominal sales now reported as 3.8% gain (prev. 3.4%) and real sales up 3.0% (prev. 2.5%), but earlier months figures saw downward revisions.
Durable goods were up 0.7%/0.9% in nominal/real terms respectively with strong gains in electronics, machinery, electrical equipment, and transport equipment – with the latter seeing broad based gains across motor vehicles, aerospace, as well as railroad stock and shipbuilding. However, the gain was more than offset by a decline in nondurables, down 1.3% in both nominal and real terms, led by petroleum, food, non-metallic minerals, and chemicals.
Regionally, manufacturing sales were down in all provinces but for Manitoba (+3.2%), Ontario (+1.2%) and Alberta (+1.3%). Declines were particularly pronounced in energy producing Newfoundland (-20.2%), Saskatchewan (-7.4%), but New Brunswick (-9.2%) and Quebec (-1.1%) also saw sizeable declines.
Inventories were up 0.1% on the month, with the inventory-to-sales ratio up slightly to 1.36. Forward looking indicators were mixed with new orders up 0.3% while unfilled orders pulled back 0.7%.
Key Implications
The surge in November, related to a rebound in automotive shipments after the October shutdowns, was not expected to continue through the year-end. Having said that, the performance was still somewhat disappointing, with the value and volumes of shipments down a touch and nearly half of all industries reporting declines. As a result of the weaker-than-expected performance, and downward revisions (on net) we’ve reduced our GDP tracking for Q4 by about 0.2 percentage points to 2%.
Still, there is some bright spots in the report. The decline was heavily concentrated in just two industries: food manufacturing and petroleum, with the weakness unlikely to be repeated. In fact, shipments in these industries should trend higher going forward, positioning the headline for a good start to 2018 despite the flat reading on U.S. industrial production to start the year. What’s more, the outsized declines in Newfoundland and New Brunswick (which were responsible for double the overall pullback), are likely to be temporary.
On the whole, we remain cautiously optimistic for the Canadian manufacturing sector. On the one hand, rising global demand alongside a U.S. economy that’s about to get a dose of fiscal stimulus bode well for the export-oriented sector, with the relatively inexpensive loonie also providing support. On the other hand, rising protectionist sentiment, including the resurgence of “Buy American” pose a downside risk for the sector, with the ongoing NAFTA negotiations hanging like a storm cloud over the outlook.
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