Canadian manufacturing output rose in May after months of back-to-back declines
Toronto – The latest RBC Canadian Manufacturing Purchasing Managers’ Index (RBC PMI) survey highlighted that manufacturing production grew in May, ending a three-month period of back-to-back declines.
A stabilization in export orders provided support to the manufacturing sector during the latest survey period, although overall volumes of new work continued to decrease. Meanwhile, input cost inflation eased to its lowest since January, despite widespread reports that exchange rate depreciation contributed to upward pressure on imported raw material prices.
A monthly survey, conducted in association with Markit, a global financial information services company, and the Supply Chain Management Association (SCMA), the RBC PMI offers a comprehensive and early indicator of trends in the Canadian manufacturing sector.
At 49.8 in May, up slightly from 49.0 in April, the RBC Canadian Manufacturing PMI reached its highest level since January, but still signalled a fractional deterioration in overall business conditions. A modest increase in production levels was the main positive influence on the headline index in May.
“It’s encouraging to see a slight improvement in business conditions for Canada’s manufacturing in May, even though significant improvements didn’t generate enough traction to shift the sector into positive growth territory,” said Craig Wright, senior vice-president and chief economist, RBC. “Moving into the second half of the year, we expect a strengthening US economy and a weakening in currency will fuel demand for Canada’s exports, which should have a positive effect on manufacturers.”
The headline RBC PMI reflects changes in output, new orders, employment, inventories and supplier delivery times.
Anecdotal evidence suggested that signs of stabilization in client spending patterns, especially in export markets, encouraged manufacturers to boost their output levels. Although total new work dropped in May, the rate of decline moderated from the survey-record pace seen in April. Survey respondents noted that exchange rate depreciation helped to support export order wins at their plants. However, a number of firms continued to report that falling capital spending among clients in the energy sector weighed on overall demand conditions in May.
The latest data indicated a further slight reduction in manufacturing payroll numbers, which extended the current period of net job shedding to five months. Companies that lowered their staffing levels generally cited restructuring efforts in response to reduced workloads. May data signaled a fall in backlogs of work across the manufacturing sector for the sixth month running.
Softer underlying demand contributed to cautious inventory policies at manufacturing firms in May. Stocks of finished goods and pre-production inventories both continued to decrease during the latest survey period. Moreover, the rate of decline in input stocks was the second-fastest since November 2010.
Average lead times from suppliers lengthened again in May, despite a further reduction in input buying across the manufacturing sector. That said, deterioration in vendor performance was the least marked in nearly two years.
On the prices front, average cost burdens increased for the thirty-fourth month running in May. Manufacturers commented on higher prices for a range of raw materials, especially steel. However, the overall rate of input cost inflation moderated to its lowest level since January. Factory gate charges rose at a marginal pace in May, with a number of firms commenting that strong competitive pressures had contributed to an erosion of operating margins. Nonetheless, the overall rate of output charge inflation across the manufacturing sector edged up to a three-month high in May.
Regional highlights include:
– Deteriorating overall business conditions were largely confined to Alberta and British Columbia
– Manufacturers in Alberta and British Columbia posted sharp falls in output, new orders and employment
– Business conditions were broadly stable in Quebec, and improved markedly in Ontario and the ‘Rest of Canada’
– In Ontario, output expanded at a robust pace, helped by the fastest rise in new export work for just over four years
“The manufacturing sector downturn is starting to reverse course in Canada, with the latest survey indicating a modest rebound in production volumes and an overall stabilization in export sales,” said Cheryl Paradowski, president and chief executive officer, SCMA. “While lower levels of energy sector capex continued to weigh on manufacturing performance, exchange rate depreciation has helped boost competitiveness and offset some of the weakness in domestic demand.
“A regional breakdown of the manufacturing PMI indicates particularly strong output and export sales growth in Ontario, while all regions except Alberta and BC recorded net job creation. Even in Alberta and BC, the overall downturn in business conditions was less marked than April’s survey-record low.”