Canadian manufacturing conditions strengthen modestly in July: Survey

The pace of new order growth in the Canadian manufacturing sector quickened during July, according to the RBC Canadian Manufacturing Purchasing Managers Index (RBC PMI), a newly launched monthly survey.

The RBC PMI indicated that overall business conditions in Canada’s manufacturing sector improved further during July. Moreover, the rate of expansion remained solid and was slightly faster than that registered in June. The latest improvement largely reflected further new order growth and a concurrent rise in output. However, production increased only modestly during the latest survey period. Meanwhile, inflationary pressures eased further, with the rate of input price inflation the slowest in seven months.

At 53.1, up from 52.8 in June, the headline RBC PMI – a composite indicator designed to provide a single-figure snapshot of the health of the manufacturing sector – signalled a solid improvement in operating conditions within Canada’s manufacturing sector in July. The PMI has now posted above the 50.0 no-change threshold that separates growth from contraction for 10 consecutive months.

“The uptick in the New Orders Index that indicated a solid rate of expansion, coupled with improved business conditions across the country, bode well for Canada’s manufacturing sector overall,” said Paul Ferley, assistant chief economist, RBC. “However, modest gains in production and the soaring loonie may offset some of the momentum in the sector as we move into the second half of the year.”

In addition to the headline RBC PMI, the survey also tracks changes in output, new orders, employment, inventories, prices and supplier delivery times. Index readings above 50.0 signal expansion from the previous month, readings below 50.0 indicate contraction.

Key findings from the July survey include:

• Volumes of new work increased solidly;

• Employment growth continued, albeit at slowest pace since November 2010; and

• Rate of input price inflation eased to seven-month low.

The latest expansion in the Canadian manufacturing sector generally reflected further new order growth; notably, the rise in new work intakes was solid and faster than that recorded in June. A number of firms commented on new client wins in both the Canadian and international markets in July.

In light of greater new order requirements, Canadian manufacturers increased production during the latest survey period. That said, output levels rose only modestly and at a broadly similar rate to that registered in June. Firms also depleted their stocks of finished goods to supplement increased production in July.

The amount of outstanding work recorded by firms operating in the Canadian manufacturing sector decreased during July. However, backlogs of work were depleted only slightly.

Reflective of output growth, the amount of inputs bought by respondents rose solidly during the latest survey period. Input inventories were also accumulated for the third consecutive month in July. Nevertheless, suppliers’ delivery times lengthened further, with the latest increase in lead times remaining marked. Approximately 24 percent of panelists reported longer delivery times in July. Anecdotal evidence suggested that vendors held lower stocks of inputs and struggled to cope with greater demand.

The number of people employed in the Canadian manufacturing sector increased during July. Almost 18 percent of surveyed firms hired additional staff and generally linked employment growth to larger new order volumes. That said, the rate of job creation eased to the slowest since November 2010.

On the inflation front, input prices rose markedly during the latest survey period. Transportation, steel and plastics were all particularly mentioned by panelists as increasing in cost. However, the rate of input price inflation eased further to a seven-month low in July.

Monitored companies passed on part of their greater cost burdens to clients by raising factory gate prices in July. Although output charges rose solidly and at a slightly faster rate than that recorded in June, growth remained notably weaker than the overall rise in cost burdens.

Regional highlights include:

• Quebec recorded the slowest increase in new order growth in July.

• Manufacturing companies based in Alberta and British Columbia reported the strongest monthly rise in staffing levels during the latest survey period.

• The fastest rate of input price inflation was registered in Quebec, while survey respondents in Ontario raised their output charges to the greatest extent in July.

“The Canadian manufacturing sector grew solidly in July, and at a slightly faster pace than in June. This largely reflected stronger new order growth,” said Cheryl Paradowski, president and chief executive officer, Purchasing Management Association of Canada (PMAC). “New work intakes generally rose on the back of stronger demand within Canada, as new export orders increased only marginally during the latest survey period. Meanwhile, although input price inflation eased to a seven-month low in July, surveyed firms particularly mentioned fuel and transport as increasing in cost.”

The survey was conducted in association with Markit, a global financial information services company, and PMAC, which offers a comprehensive and early indicator of trends in the Canadian manufacturing sector.

The report is available at www.rbc.com/newsroom/pmi.