Manufacturing business conditions continue to improve

Oct. 7, 2014 – Canadian manufacturers cited further improvement in overall business conditions in September, reflecting higher levels of output, new orders and employment across the sector, according to the RBC Canadian Manufacturing Purchasing Managers’ Index (RBC PMI). However, the strength of the upturn moderated during the latest survey period, in part thanks to stagnation in new export business.

A monthly survey, conducted in association with Markit, a leading 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 53.5 in September, the seasonally adjusted RBC Canadian Manufacturing PMI eased from the nine-month high registered during August (54.8). The latest reading was the lowest since June, but remained well above the neutral 50.0 value and, overall, signalled a solid improvement in business conditions. The third quarter average for the headline index (54.2) was the highest it has been since the fourth quarter of 2013.

“While we did see a slight dip in the index after a nine-month high in August, Canada’s manufacturing sector continued to show strength,” said Craig Wright, senior vice-president and chief economist, RBC. “As we progress into the final months of 2014, we expect a further strengthening in the U.S economy will augment Canadian exports and set the stage for solid manufacturing business conditions overall.”

The headline RBC PMI reflects changes in output, new orders, employment, inventories and supplier delivery times. Key findings from the September survey include:
• A slowdown in both output and new order growth;
• New export work stagnated; and
• The solid pace of job creation was maintained.

Survey respondents suggested that softer increases in production reflected a slowdown in new business gains. The latest rise in incoming new work was the weakest since May. This partly reflected a stagnation of new export orders in September, which ended a 17-month period of expansion. Anecdotal evidence suggested that increased demand from clients in the U.S. had been offset by subdued business conditions in other markets (especially the euro area).

A solid rate of job creation was maintained in September, with employment growth easing only slightly from August’s 11-month high. Increased staffing levels were attributed to rising volumes of new work in recent months and corresponding investments in additional capacity. Backlogs of work nonetheless increased for the eighth month running, albeit at a marginal pace.

In line with rising new business volumes and greater production schedules, the latest survey pointed to a solid upturn in purchasing activity across the manufacturing sector. However, stocks of purchases and inventories of finished goods were reduced in September. The latest survey also pointed to longer delivery times from suppliers, which has now been the case for 15 consecutive months. Some manufacturers commented that low stocks and delays in raw material shipments had resulted in longer lead-times from vendors.

Manufacturers pointed to a further robust rise in their average cost burdens, which was generally attributed to greater raw material prices and transportation costs. Although the rate of cost inflation accelerated since August, the latest rise was still much weaker than those seen in the first half of 2014. Meanwhile, factory gate price inflation eased for the fourth month running to only a marginal pace.

Regional highlights include:
• Alberta and British Columbia remained the best performing regions overall, followed by Ontario;
• Quebec registered the slowest improvement in business conditions;
• Alberta and British Columbia were the only regions to record expansion in new export orders; and  
• Job creation was recorded in all four regions monitored by the survey.

“A solid rebound in Canada’s manufacturing sector continued at the end of the third quarter, despite a slight loss of momentum since August” said Cheryl Paradowski, president and chief executive officer, SCMA. “Improving business conditions helped sustain manufacturing jobs growth, as firms looked to build additional capacity amid a more favourable demand environment. Stagnating export sales were a notable setback in September, but an ongoing recovery in U.S. economic conditions should help boost the Canadian manufacturing sector during the final quarter of 2014.”

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