Report: Canadian manufacturing down in July despite rise in production

The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) posted below the 50.0 no-change mark for a third month running in July. However, it was up to 49.6, from 48.8 in June. The headline index pointed to the slowest deterioration in operating conditions in the current contractionary sequence.

Canada’s manufacturing sector remained in contraction territory during July, but only just as a marginal rise in output and a weaker fall in new orders were registered. Job cuts were, however, more prominent, whilst there were accelerations in both input and output price inflation. Firms retained some confidence for the future, with sentiment picking up to a four-month high.

The sub-50 PMI reading masked a welcome return to production growth in July. The latest data showed that output rose for the first time since April. However, modest growth reflected a build-up in warehouse inventories, which increased slightly for a third month running, and a twelfth successive reduction of work outstanding. These developments in stocks and backlogs were the result of an excess of production over sales as July’s survey revealed a fifth straight monthly fall in new orders. Panellists commented that market uncertainty persisted, with clients reticent to commit to new business. These factors were primarily centred on home markets, however, as export sales rose in July for the first time since May 2022. Companies noted better demand from the neighbouring United States.

Commenting on the latest survey results, Paul Smith, Economics director at S&P Global Market Intelligence said, “July’s PMI results offered a rather mixed bag on the performance of the Canadian manufacturing sector. On the one hand, there was a welcome return to output growth, following two successive months of contraction. However, concurrently there was another, admittedly small, drop in new orders as firms continued to signal a high degree of market uncertainty and reluctance amongst clients to commit to new work.”

An uncertain business climate meant firms continued to adopt cautious purchasing and employment strategies. Buying of inputs fell again, extending the current sequence of contraction to 12 months, with firms signalling a preference wherever possible to utilise existing inventories in production. Similarly, employment levels were cut for a third month in a row, with firms tending not to replace leavers at a time of insufficient new orders. There were also reports of difficulties in finding suitable staff to fill existing vacancies.

On the prices front, rising transport costs, increased interest rates and generally higher input prices were reported to have pushed up operating expenses for a second successive month. Although modest, and still well below the levels recorded at the start of the year, inflation picked up during July to a three-month high. Firms sought to protect their margins by raising output charges to the greatest degree since April. However, there was evidence that competitive pressures placed a limit on pricing power.

Looking ahead to the coming 12 months, firms retained a positive outlook overall, with sentiment picking up to its highest level since March. Companies expect that market demand, aided by the release of new products, will improve in the year ahead.

Smith added, “There was an intensification of price pressures as firms reported a myriad of inflationary factors in July. However, amid reports of growing market competition and with vendors seemingly having sufficient capacity to easily cope with demand, inflation rates remain broadly under control and well down on levels seen around the turn of the year.”