August manufacturing index shows weakening business conditions
By Royal Bank of Canada
September 1, 2015
By Royal Bank of Canada
Toronto – The RBC Canadian Manufacturing PMI for August 2015 fell marginally to 49.4, from 50.8 in July 2015, indicating moderately weakening business conditions.
Since January the overall index has been fluctuating around the “50 level” that separates rising from declining business conditions.
The moderation in the August index reflected a weakening in all five major components of the PMI.
Regionally, declining business conditions in Alberta and British Columbia are offsetting rising conditions elsewhere in the country.
The RBC PMI disappointingly moderated in August, indicating weakening in business conditions in the face of renewed downward pressure on oil prices. The attendant weakness in the oil-producing regions is offsetting strength elsewhere in the country that benefit from both lower energy costs and attendant factors supportive of stronger export growth, i.e., strong US growth and a lower Canadian dollar.
With indications that the US rebounded even more strongly than previously assumed in Q2 and with much of that strength persisting into the third quarter, RBC’s expectation is that these supportive factors will eventually have the more dominant impact on the PMI. This is expected to return the measure to an above-50 reading in subsequent months and to trend closer towards the PMI’s longer-run average value of 53.
The PMI is calculated as a diffusion measure with a reading above/below 50 indicating improving/deteriorating business conditions in the manufacturing sector. The farther the reading is above/below the breakeven level of 50 the greater is the pace of improvement/deterioration. The August report indicates business conditions deteriorated modestly in August after a slight improvement in July. The deterioration coincided with oil prices weakening sharply in the month seemingly raising concerns about the knock-on effect to the energy sector and those areas of the economy servicing that sector.
The PMI is an aggregate of five major components. In August all five measures moved modestly lower. The key new orders component indicated a marginal rise in new orders with an index reading of 50.3 though this was down slightly from the 50.9 that was recorded in July. The weakening reportedly resulted from “another marked fall in demand from energy sector clients” for investment goods, which offset strengthening sales of consumer goods.
The output measure returned to declining activity with the index dropping to 49.4 in August from 51.6 in July. Respondents mentioned concerns about global growth weighing on output levels.
The employment measure sank deeper into negative territory, dropping to 47.2 from 49.5 between August and July. Reportedly the drop reflected the “non-replacement” of job leavers in the month.
The delivery times measure, which enters the PMI inversely, rose slightly to 47.9 in August from 47.7 in July. This indicated that though delivery times continued to slow, the extent of the slowing was slightly less in August compared to July.
Finally, manufacturers indicated that input inventories were reduced more quickly in August than in July with the index reading dropping to 47.2 from 48.6.
Other components of the survey, which are not included in the calculation of the overall PMI measure, also confirmed a moderately weakening trend in August with three of the four measures moving lower. Export orders continued to rise, though barely so, with a August reading of 50.6 that was down marginally from the 50.8 that was recorded in July.
The regional details indicate declining exports in the Alberta/British Columbia region, which had a “new export orders” index reading in August of 47.7, are being offset by rising exports elsewhere in the country led by Ontario, which had a comparable export reading of a very strong 55.1.
A more significant deterioration occurred in the backlog of work index nationally, which dropped to 46.3 from 49.3 in July. The stock of finished goods index moved down as well to 48.6 in August from 49.8 in July. Purchases of inputs continued to decline though the pace held steady with the August index remaining unchanged at 48.8.
Input prices rose in August at a faster rate than in July, with the index rising to 59.4 in August from 57.1 in July. Respondents attributed the increase to the depreciation of the Canadian dollar that seemingly more than offset the weakening in global commodity prices, such as for oil, quoted on a US dollar basis.
Output prices continued to rise in August though at a slower pace relative to July, with the index dropping to 52.0 from 52.3 over this period. Respondents indicated upward pressure was emanating from “higher imported raw material costs” though competitive pressures were limiting how much was getting passed along to purchasers.
The RBC PMI is also calculated on a regional basis for Ontario, Quebec, Alberta/British Columbia and the “Rest of Canada.” All four regions saw a drop in their respective index readings in August implying some potential wariness about the fallout from the drop in oil prices nationally. However, it is also the case that Alberta/British Columbia is the only region indicating declining confidence, with the index dropping to 44.6 in August from 45.5 in July, with all other regions showing improving conditions.
Ontario continues to show the strongest business conditions, with an index reading in August of 54.0 despite moderating slightly from 55.5 in July. The support to the Ontario economy occurs not just via lower energy costs but also via strong export demand with lower oil prices both boosting US growth and pressuring the Canadian dollar lower. Confirmation of such was provided in this report with Ontario’s new export orders index rising to a robust 55.1 in August from 54.1 in July.
The export index for Quebec was less encouraging, dropping to 50.0 from 51.5 in July, alongside a lower overall PMI index for the province of 52.1 down from 52.5 in July. Though conditions continue to improve in the “Rest of Canada” with an August index reading of 51.3, it is down significantly from the 54.6 that prevailed in July. The weakening could reflect not only lower oil prices but drought conditions weighing on agricultural production in Saskatchewan.
The RBC PMI disappointingly moderated in August indicating weakening in business conditions in the face of renewed downward pressure on oil prices. The attendant weakness in the oil-producing regions is offsetting strength elsewhere in the country benefitting from both lower energy costs and attendant factors supportive of stronger export growth, i.e., strong US growth and a lower Canadian dollar. With indications that the US rebounded even more strongly than previously assumed in Q2 and with much of that strength persisting into the third quarter, RBC’s expectation is that these supportive factors will eventually have the more dominant impact on the PMI. This is expected to return the measure to an above-50 reading in subsequent months and to trend closer towards the PMI’s longer-run average value of 53.