Report: Canadian manufacturing remains in troubled waters in September

S&P Global Canada Manufacturing’s seasonally adjusted Purchasing Managers’ Index (PMI) registered at 49.8 in September. Up from 48.7 in August, the data indicates a second monthly deterioration in manufacturing performance. With only a slight fall, the headline figure has improved from that seen in August and is only fractionally below the 50.0 neutral value.

The latest data for Canada’s manufacturing sector indicates that September was another difficult month. Output and new orders were down. Interest rate hikes and client uncertainty impacted demand. Firms are less optimistic about their output expectations for the year ahead, as per the survey. Subsequently, staffing levels, purchasing activity and inventory holdings decreased for the second consecutive month.

On a positive note, both input price and output charge inflation eased to 22-month lows. However, there were still reports of rising wage and material prices, during the month.

A solid reduction in new orders contributed heavily to the latest decline. According to panel comments, interest rate hikes and weak macroeconomic conditions kept clients from placing orders. There was a similar trend in exports, which declined for the fourth consecutive month. However, the rate of contraction in both cases eased from those seen in the previous survey period.

Production levels in Canada’s manufacturing sector fell for the third consecutive month in September. Manufacturers attributed the fall to a subdued demand environment and a lack of material availability. The rate of decline was modest and eased notably from that in August.

“The close of the third quarter yielded a mixed bag of results for Canada’s manufacturing sector with a backto-back deterioration in operating conditions recorded during September. Output and new orders continued to fall with the sector still feeling the repercussions of material shortages and delivery delays. Demand was once again hit by client hesitancy in the wake of rising interest rates and weak macroeconomic conditions. This led to a third monthly build-up of finished items held at Canadian manufacturing firms; the longest run in over eight years,” said Shreeya Patel, Economist at S&P Global Market Intelligence.

Canada’s manufacturing sector showed signs of spare capacity, due to the decline in new orders. Backlogs decreased at a solid and accelerated pace.

With a lack of pressure on operating capacity, Canadian manufacturing firms cut their headcounts for the second month in a row. Firms attributed job shedding to cost-saving efforts.

Sustained reductions in output and difficulties sourcing some inputs hampered purchasing activity in September. Stocks of pre-production inventories also continued to decrease.

With demand falling sharply, firms recorded an accumulation in post-production inventory holdings. The latest increase signalled three successive months of expansion. This was the longest sequence of growth for over eight years.

Vendor performance deteriorated at the end of the third quarter. Lead times lengthened to the least extent for over two-and-a-half years.

Looking ahead, firms are still optimistic that their output levels would grow over the coming 12 months. However, the degree of sentiment is the fifth-weakest since the question was first put forward in July 2012. Anecdotal evidence indicates greater concerns over a recession. Rising interest rates and weak demand also weighed on confidence.

In positive news, Canadian manufacturing firms registered the weakest inflation of input costs in 22 months. The rate of increase has slowed for the third month running. Despite this, panellists highlighted a number of price rises, including fuel, wage and material charges.

Firms continued to pass on higher cost burdens to their clients, though selling prices also rose at the weakest pace for 22 months.

“More concerning news came on the sentiment front with firms less optimistic about output levels in the next 12 months. Anecdotal evidence suggested that Canadian companies feared a recession which had led firms to reevaluate their growth projections, commented Patel.

“That said, not all is gloom and doom with latest data also pointing to a slowdown in inflation. Both output charge and input price inflation moderated to 22-month lows and were only just above their respective long-run series averages, suggesting tighter monetary policies are having the desired effect on price pressures,” she added.