MRO Magazine


Factory production weakens, but strong enough to boost economic growth

Canada’s key manufacturing sector closed out last year on a modest upswing, recording a 1.2 per cent gain in output for December that is regarded as positive to economic growth.

Bottom line dollar-value sales were disappointing, however, rising only 0.6 per cent when economists had pencilled in a two per cent pop.

But much of the disappointment was due to price effects. Sales in volume terms grew at twice the rate, which should add to gross domestic product growth in the fourth quarter, said analysts.

“I call it a decent but unspectacular result,” said Douglas Porter, deputy chief economist with BMO Capital Markets.

“The figure that feeds into gross domestic product is actually volume of sales, so based on our early indications it looks like December GDP will show a nice little gain.”

Porter said he now believes overall fourth-quarter growth will come in at about 1.8 per cent, which would constitute positive, if modest, momentum for the economy.

Following the second-quarter disruptions from the Japanese disaster and other one-off events, manufacturing in Canada has been on a solid run since the summer.

By one analysis, volume sales grew by almost 10 per cent in the fourth quarter, and 13.3 per cent in the third.

“It’s a bit puzzling,” said Scotiabank’s Derek Holt. “The whole theory that the Canadian manufacturing sector would be pummelled by the strong dollar hasn’t been borne out.”

One reason is that the U.S. economy has been much stronger than anticipated. Data this week continued to show strength in the U.S. factory sector, which is closely integrated with Canada’s, and a modest recovery in the battered housing sector.

Also on Thursday, the U.S. reported its initial jobless claims continued to fall, hitting levels not seen since March 2008, a strong indicator that January’s strong job creation performance was not a one-month aberration.

Holt cautioned that longer-term indicators for Canada’s factory sector were not as positive. New orders fell sharply by 2.8 per cent and unfilled orders fell by 1.6 per cent, which could suggest softer months ahead.

The key weakness in December’s manufacturing data was the 5.6 per cent setback among petroleum and coal product producers to $6.9 billion, although half of that loss was due to a weaker dollar exchange.

Overall, sales increased in 12 of 21 industries representing two-thirds of manufacturing, and seven subsectors climbed past pre-recession levels.

In dollar terms, manufacturing sales rose to $49.9 billion in December, the fifth increase in six months, and within shouting distance of the $50.2 billion recorded in October 2008, when the economic downturn began.

By industry, motor vehicle manufacturers rose 2.9 per cent in December to $4.3 billion, the highest monthly total since November 2007. Motor vehicle parts industry rose 5.5 per cent to $1.9 billion.

The transportation equipment industry as a whole had the largest dollar gains of any industry, with a 3.7 per cent increase in sales to $8.5 billion. This was the seventh consecutive monthly increase.

Plastics and rubber products sales increased 7.5 per to $2.1 billion, their highest level since August 2007. Greater sales volumes were entirely responsible for a 2.7 per cent increase in the primary metal industry to $4.2 billion, the third consecutive monthly gain.

For 2011 as a whole, manufacturing sales amounted to $571 billion, up 7.8 per cent from 2010, with higher sales in the petroleum and coal products, primary metal, machinery and transportation equipment industries.