Study: Is Canada’s manufacturing lagging compared with the United States?
Ottawa, ON -- For the past year, manufacturers have been somewhat pessimistic about their future, as shipments and ...
Ottawa, ON — For the past year, manufacturers have been somewhat pessimistic about their future, as shipments and orders stagnated while inventories piled-up. At first glance, Canada’s manufacturing shipments fared much worse than those of their U.S. counterparts, according to a new study released today by Statistics Canada in the Canadian Economic Observer.
From September 2004 (when the divergence began) to August 2005, the gap between the growth in U.S. and Canadian shipments was 5.2 percentage points, with current dollar shipments up 5.5% in the United States but only 0.3% in Canada.
In total, 14 of 21 industries contributed to this divergence. The most important contributions were recorded for transportation equipment, wood products, petroleum, chemicals and food, some of Canada’s largest manufacturing industries.
Much of the gap between the growth of shipments in Canada and the United States over the past year is due to differences in the prices of manufactured goods as they leave the factory gate. In constant dollars, when the effect of prices is eliminated, the growth in Canadian shipments closely matched the pace set south of the border. The gap between the volume of U.S. and Canadian shipments is practically nil (only 0.3 percentage points). In fact, constant dollar shipments in Canada outperformed the United States in 11 of 21 industries.
The recent appreciation of the Canadian dollar has resulted in lower Canadian producer prices. Manufacturers export close to half of all shipments. Industries that export a large portion of their shipments include motor vehicles, machinery, pulp and paper, and wood products. Prices for these goods are usually quoted in U.S. dollars. Since these Canadian manufacturers get paid in U.S. greenbacks, they received fewer Canadian dollars for their U.S. dollars when the exchange rate rose. While earnings were falling, the cost of inputs remained the same (except for imported investment goods).
With the rising dollar, Canadian manufacturers also faced stiffer competition on the foreign market as their products were more expensive. Throughout the 1990s, a low dollar increased the demand for Canadian-made goods by making imported goods more expensive while making exports cheaper for foreigners. With the low dollar favouring Canadian manufacturers, the gap in shipments fell steadily.
The Canadian dollar finally bottomed out in January 2002 when it reached 62.49 cents per U.S. dollar. Since 2003, the Canadian dollar has appreciated.
The role of price differences in explaining the gap in shipments was especially significant for autos, wood product, and petroleum and coal products.
While price differences were the largest factor, structural differences explain most of the remainder of the gap in the growth of shipments, particularly for computer and electronic products. If computers and electronics were as important in Canada as in the United States, the gap in shipments would have been reduced.
While overall shipment volumes are keeping up with those in the United States, one area where Canada’s factories may be lagging is in profits. From their low in 2002 to 2004, manufacturing profits increased 191% in the United States compared to only 19% in Canada. This may reflect the severe squeeze on prices from the stronger dollar.
The study “Is Canada’s manufacturing lagging compared with the U.S.?” is now available for free online. The study is also included in the December Internet edition of Canadian Economic Observer, Volume 18, no. 12 (11-010-XIB, $19/$182), which is now available. The monthly paper version of Canadian Economic Observer, Vol. 18, no. 12 (11-010-XPB, $25/$243) also is available now.