Report: Canada’s manufacturing sector improves in May; numbers show 23 months of continuous growth

S&P Global Canada Manufacturing’s Purchasing Managers’ Index (PMI) registered 56.8 in May, up from 56.2 in April. The most recent numbers indicate that Canada’s manufacturing sector has seen 23 months of continuous growth. The latest expansion has been much quicker than the long-run series average.

Stronger expansions in output, new orders and employment in May contributed to the improvement of Canada’s manufacturing sector. Firms boosted their buying activity at a record rate due to the sustained demand activity. Capacity pressures continued to increase.

The survey found that business confidence was at a joint ten-month low despite stronger uplifts. The results reflected concerns with intense cost pressures. Output charge and input price inflation rates eased to the softest since February.

“Canada’s manufacturing sector has recovered well from the pandemic, registering output growth in almost every month for the last two years. Demand continues to flourish while firms are committed to growing their businesses through a variety of different ventures including product development, improving e-commerce, investing in new machinery and expanding their operations. As a result, companies have struggled to keep up with demand, though severe labour and material shortages can also be blamed,” said Shreeya Patel, Economist at S&P Global Market Intelligence.

Favourable market conditions for the Canadian manufacturing sector

A quicker increase in new orders was a key contributor to the improved numbers. May recorded a stronger demand, especially for consumer goods. Survey respondents believe that the receding pandemic restrictions helped with the favourable demand for Canadian manufactured goods. International sales increased, but at a softer pace than in April. Surveyed firms noted that there was higher demand from the U.S. market.

Companies responded to rising demand by lifting their output levels for the twenty-third month in succession. Larger workforces helped firms to boost their output, while panel comments also suggested some inputs were more readily available in May.

Existing challenges impact growth results

Capacity pressures continued to build despite efforts to enhance production and the strongest increase in headcounts for 17 months. The overall rate of backlog accumulation was marked, the quickest for six months and among the strongest in the near 12-year survey history. Firms had insufficient capacity to deal with the surge in new orders. However, there were also reports of absenteeism due to illnesses. Companies prioritized incoming orders and refrained from adding to post-production inventories, which fell solidly.

Supplier performance was down once again. Port congestions, material scarcity and lockdowns in China led to delivery delays. However, the incidence of delays was the second-lowest for 15 months.

Firms continued to add to their pre-production inventories as they sought to mitigate against any future supply-chain issues. In fact, the quantity of purchases rose at the quickest rate in the series’ history, beating the previous record set in July 2018. Meanwhile, pre-production stocks rose at the fourth-strongest rate in the series.

Raw material scarcity, ongoing supply-chain disruption and lockdowns in China continued to aggravate cost pressures in May. Higher prices were reported for metals, resin, fuel, transportation, machinery and other inputs. The rate of inflation moderated to a three-month low but was still marked compared to the long-run series average. Higher expenses were passed on to clients with the overall rate of selling price inflation the third-strongest in the series’ history.

Inflationary concerns weighed slightly on optimism, which moderated to a joint ten-month low in May. That said, firms were still optimistic about output growth over the year ahead amid plans to expand their online presence, greater consumer demand and new client wins.

“Firms and their clients can expect to face rising costs for energy as well as other essential inputs. Manufacturing companies in Canada have done well so far in anticipating shortages and price hikes, which will no doubt persist. Fortunately, rates of inflation are starting to subside, which firms can only hope will continue,” explained Patel.

Compare with S&P Global Canada Manufacturing’s Purchasing Managers’ Index results from April and March.