Report: Manufacturing growth slows in June, but expansion continues

Canadian manufacturers continued to see expansion at the end of Q2 2021, led by upticks in output and new orders, says IHS Markit Canada in its latest survey report.

The headline seasonally adjusted Manufacturing Purchasing Managers’ Index (PMI) registered 56.5 in June, down from 57.0 in May, to signal the 12th consecutive expansion in operating conditions. The latest uptick was the softest since February, but was sharp in the context of the historical average.

To meet rising demand, firms raised their employment levels for the 12th consecutive month, although difficulties sourcing skilled workers led to another rise in backlogs.

“A record uptick in pre-production inventory holdings suggests firms are gearing up for another busy quarter while a rise in backlogs could see job creation continue,” says Shreeya Patel, economist at IHS Markit, in a statement.

“Yet, material shortages were again evident leading to delivery delays and sharp price pressures. COVID-19 restrictions and freight delays were also blamed for supply-chain disruption.”

Meanwhile, vendor performance deteriorated again, and at the fourth most marked rate in the series history. Nevertheless, firms surveyed were upbeat about their prospects for growth over the next 12 months.

“Price pressures continued to mount in June, with rates of output and input price inflation robust overall. Firms will hope that material availability improves over the course of the year to relieve some pressures on prices, but for now Canadian manufactures seem well prepared if shortages are to persist.”

Production volumes increased solidly at the end of the second quarter, although the rate of expansion eased slightly from that seen in the previous survey period. Firms reporting output growth mentioned greater client demand supported the rise.

Similarly, new work received at Canadian good producers rose sharply. Panel members often mentioned greater client demand in both domestic and international markets (mainly the U.S.).

Sustained output growth encouraged firms to add to their headcounts again during the month. The uptick extended the period of job creation to 12 months although the latest rise was the softest since February.

Amid reports of material shortages, average lead times lengthened in June. COVID-19 restrictions and freight delays were also linked to deteriorating vendor performance. In efforts to reduce future delays, firms added to their pre-production inventory holdings, and at a rate that was the quickest in the ten-and-a-a-half year history of the survey.

Despite additions to headcounts, backlogs rose solidly, with the expansion extending the sequence of accumulation to 11 consecutive months. Firms often linked deteriorating vendor performance and a shortage of raw materials to the increase.

Rising backlogs also made it difficult for firms to add to their postproduction inventories, with stocks of finished goods depleted for the third month running.

Raw material scarcity (particularly for metals and wood) continued to exert upward pressure on firms cost burdens, with input prices rising at the joint-quickest rate since August 2018. Higher expenses were passed on to clients, although the rate of output price inflation softened form May’s series high.

Finally, hopes of greater client demand and plans to expand business operations fuelled sentiment in June. The degree of optimism improved noticeably from that in the previous survey period, and reached a three-month high.