Canadian manufacturing sales fell 1.0% in January, or a touch worse than the 0.9% decline expected by the markets. However, the decline came atop of positive revisions to the previous month, with the December decline toned down from 0.3% to 0.1%. After accounting for price changes the volume of sales was down by slightly more, or 1.1%. But again, the upward revision helped offset some of the decline.
Durables, and more specifically transport equipment, accounted for the entirety of the decline, and excluding this broad category left shipments flat on the month (-0.1% m/m). Transport products fell by a whopping 6.3%, as motor vehicles (-8.0%), auto parts (-3.8%), aerospace (-9.5%), and rolling stock (-14.4%) were down sharply. Most other durable categories experienced less pronounced declines, with fabricated metals (1.6%), furniture (1.9%), and miscellaneous products (3.4%) increasing on the month. Nondurables fared better, up 1.7%, led by chemicals (+6.1%) and petroleum (+6.5%).
Regionally, manufacturing sales were down in half of all provinces, led by P.E.I. (-13.0%), Manitoba (-3.1%), and Ontario (-2.3%). Saskatchewan saw the biggest gain, at 5.7% on the month.
Inventories were up 0.9% on the month, with the inventory-to-sales ratio up slightly to 1.39 on the weakness in shipments. Forward looking indicators were relatively constuctive, with unfilled orders up 0.6% and new orders ticking up 0.1%.
Key Implications
Canadian manufacturing started the year off on a weak note with both value and volumes of shipments down on the month. However, much of the decline was anticipated, owing to a longer shut-in by GM as well as a one-day strike across auto marts manufacturers. Taken together with the positive revision to December’s numbers, this morning’s report keeps our view of manufacturing output and exports in the first-quarter largely unchanged, with real GDP growth around the mid-1% mark.
The dissipation of the transitory factors which held back January shipments bodes well for the February figure, which we expect will indicate a sharp rebound. Moreover, the uptick in new and unfilled orders, should also provide some support. However, this needs to be taken in context with an elevated inventory-to-sales ratio in the sector.
The Canadian manufacturing sector should benefit from the improving U.S. economy over the near- to medium-term. Manufacturing industrial production surged 1.2% in February, to a new cyclical record, while fiscal stimulus in the form of tax cuts and a budget deal offer further boost to demand. Demand should be particularly strong in the primary and fabricated metal industries, with Canada getting an exemption to the U.S. tariffs on imports of aluminum and steel. However, the exemption is conditional on a successful renegotiation of NAFTA, with the pact’s survival a crucial element of the manufacturing outlook.
