How U.S. economic events affect Canadian manufacturing

With the majority of Canadian exports destined for the American market, the United States is clearly Canada’s primary trading partner, according to a recent Manufacturing Insight analysis by Statistics Canada of the 2000 to 2004 period.

During 2003, close to 86% of all merchandise exports was shipped to the United States. Of goods manufactured in Canada, just over half are exported to the United States. Since the U.S. economy is a dominant influence, it might be expected that economic events in the United States will directly impact the Canadian manufacturing sector.

The question arises: Is there a lag between Canadian and U.S. manufacturing trends, and if so, how long does it take Canadian manufacturers to adjust following a shift in the United States?

The following is a preliminary review of the trends in manufacturing activity in Canada and the United States. Data from this analysis are from CANSIM tables 304-0002, 304-0003 and 304-0014 and the United States Census Bureau. Additional analysis would be required to fully examine this question, says Statistics Canada.

It could be expected that Canadian manufacturers require some time to respond to changes in U.S. demand, and this would be reflected in their manufacturing data. However, upon examining the monthly levels of manufacturing shipments for both Canada and the United States over the past 20 years, there is no obvious or consistent lag time between U.S. and Canadian manufacturing. In fact, the two countries’ manufacturing levels appear to be very much in synch.

The transportation equipment industry comprises a large component of total manufacturing in Canada. This industry operates to a large extent on a just-in-time inventory system. The data were examined excluding transportation equipment, in case this industry was driving the overall trend. Again, there was no lag evident between the two countries over the past 20 years. In fact, even looking as far back as 1970, the movements in shipments are very similar in both countries.

Over the long run, manufacturing in Canada and the United States appears to be in synch, though the magnitude of the upturns or downturns may differ. These differences can be revealed by focussing on the shorter time periods surrounding significant economic turning points.

Following the high-tech crash and the slowdown in the global economy in 2001, manufacturing shipments declined in both countries. Canadian shipments decreased 11% from the peak in October 2000 ($48.6 billion) to $43.3 billion in October 2001. Canadian shipments rebounded in 2002 to pre-2000 levels, but fell back in August 2003 ($43.3 billion). Meanwhile, U.S. shipments declined slightly less, but remained depressed far longer. Shipments in the United States declined 10.4% from $355.3 billion in June 2000 to $318.5 billion in March 2002. U.S. manufacturing did recover sooner in 2003 than Canadian manufacturing.

The slower recovery of the Canadian manufacturing sector may have been the result of several unexpected events that battered the economy in 2003, including the mad cow disease crisis, the SARS outbreak and the blackout in Ontario. Other factors that may have affected shipments during this period include increasing globalization and the rising value of the Canadian dollar.

Just-in-time inventory management systems used in certain industries do not appear to be a main factor in the tandem movements in manufacturing activity.

The data for the 2000 to 2004 period appear to show some lag time between declines or increases in the U.S. and Canadian manufacturing levels. However, this period is unique relative to the long-term trend.