Signs of Slowdown: Manufacturing Sales, Volumes Both Decline in August

By: Sean Adams

  • Canadian manufacturing sales fell for the fourth month in a row, dropping by 2.0 per cent (m/m), but were up 18.2 per cent (y/y) in August. This was a larger drop than Statistics Canada’s flash estimate of 1.8 per cent. Meanwhile, sales in constant dollars declined by 1.7 per cent, after two straight months of growth, though are up 4.8 per cent (y/y).
  • Nominal sales fell in 17 of the 21 manufacturing subsectors. The largest falls were in petroleum and coal products (-3.9 per cent), chemical (-4.5 per cent), primary metal (-3.2 per cent), paper (-5.7 per cent) and wood product manufacturing (-4.3 per cent). Sales of beverage and tobacco products (+5.5 per cent) and food (+0.6 per cent) posted the largest increases.
  • Manufacturing sales fell in 7 of the 10 provinces. The largest drops were in Quebec (-5.5 per cent), Alberta (-3.1 per cent) and New Brunswick (-5.7 per cent). Sales in Manitoba increased the most (+1.8 per cent).
  • New orders (m/m) rose by 0.6 per cent, while the value of unfilled orders (m/m) was up 1.5 per cent. The jump in new orders was mainly in the transportation equipment industry, which rose by 9.8 per cent, while new orders for petroleum and coal fell by 3.9 per cent. Meanwhile, unfilled orders were up 20.8 per cent (y/y).

Key Insights

Rapid interest rate hikes may finally be catching up. With the Bank of Canada’s overnight rate higher than it has been for over 14 years, it was only a matter of time before a slowdown came. The decline in manufacturing volumes in August may signal that that time has come. Concerns over a global growth slowdown, with many advanced economies raising rates at the same time, are beginning to weigh on demand. And demand will likely continue to shrink from here. Consumers will put off big-ticket purchases that often require loans, and businesses will be hesitant to expand in the current economic environment.

Sales are falling faster than production. Inventories continue to climb, reaching a new record high in August. And it’s not just raw materials piling up. In constant dollars, inventories of finished goods rose by 2.8 per cent even as sales fell by 1.7 per cent. With demand drying up, manufacturers will have to begin cutting production to address the imbalance. With new orders relatively flat this month, and plenty of unfinished orders still in the backlog, inventory investment and production will both fall, pulling down GDP growth in the sector. With manufacturing representing nearly a tenth of Canadian GDP, that would be bad news for the economy writ large.

Manufacturers have been at the whim of global commodity markets since prices began to spike in March. The main culprit was energy, but food and mineral prices shot up too. That led to higher inflation for manufactured goods. But the trend is reversing, as raw material prices are now down 11.4 per cent from their peak in June. Falling raw material prices have contributed to a drop in the Industrial Product Price Index, which has now dropped for three months in a row. Eventually that will make its way through to consumers—but more likely in slowing inflation rather than falling consumer prices.