Strong rise in Canadian manufacturing sales good news
Paul Ferley
Assistant Chief Economist
RBC Economics Research
Manufacturing sales rose a solid 1.4% in September, slightly less than the 1.6% gain expected going into the report. The decline in August was revised down to 1.8% from the -2.1% originally estimated. The increase on a constant dollar basis was even higher, rising 1.8%, although this followed a 2.1% drop in August (and a 5.1% surge in July).
The increase in September was led by 16.4% jump in the motor vehicle component and a 13.7% surge in motor vehicle parts. StatsCan commented that, eliminating the impact of motor vehicles, part and accessories, sales were down a disappointing 0.4%. However, much of this weakness reflected a sizeable 28.6% drop in the aerospace component. After declining 34.2% in August, we had expected about one-half of the decline to be retraced in September. Eliminating both motor vehicles and aerospace, manufacturing sales rose a solid 0.5% following no change in August. This reflected broad-based gains with a majority of manufacturing sub-sectors rising in September.
In terms of other components in the report, unfilled orders fell 0.6%; new orders soared 8.3%; and inventories continued to decline, dropping 1.9%, thus pushing the inventory-to-sales measure down to 1.44 from 1.49 in August and a recent peak in May of 1.63.
The solid 1.4% rise in September manufacturing sales is encouraging both because the gains were relatively broadly based and because it almost fully offset the sizeable 1.8% drop in August. As well, the gain augurs well for September GDP to increase following disappointing numbers in the previous two months, with GDP unchanged in July and down 0.1% in August.
A recovery in activity in September is key for the Canadian economy to return to positive growth in the third quarter. Our current forecast assumes that this will barely be the case, with the economy eking out an annualized gain of only 1%. This would represent a marked improvement from declines of 6.1% and 3.4% in the first and second quarters, respectively, but it is still indicative of weak economic conditions.
With this pace of growth not sufficient to put sustained downward pressure on the unemployment rate, the Bank of Canada will be in no rush to start tightening policy. We expect that the central bank will be able to adhere to its conditional commitment of leaving the overnight rate unchanged at 0.25% through the end of the second quarter of 2010.
Assistant Chief Economist
RBC Economics Research
Manufacturing sales rose a solid 1.4% in September, slightly less than the 1.6% gain expected going into the report. The decline in August was revised down to 1.8% from the -2.1% originally estimated. The increase on a constant dollar basis was even higher, rising 1.8%, although this followed a 2.1% drop in August (and a 5.1% surge in July).
The increase in September was led by 16.4% jump in the motor vehicle component and a 13.7% surge in motor vehicle parts. StatsCan commented that, eliminating the impact of motor vehicles, part and accessories, sales were down a disappointing 0.4%. However, much of this weakness reflected a sizeable 28.6% drop in the aerospace component. After declining 34.2% in August, we had expected about one-half of the decline to be retraced in September. Eliminating both motor vehicles and aerospace, manufacturing sales rose a solid 0.5% following no change in August. This reflected broad-based gains with a majority of manufacturing sub-sectors rising in September.
In terms of other components in the report, unfilled orders fell 0.6%; new orders soared 8.3%; and inventories continued to decline, dropping 1.9%, thus pushing the inventory-to-sales measure down to 1.44 from 1.49 in August and a recent peak in May of 1.63.
The solid 1.4% rise in September manufacturing sales is encouraging both because the gains were relatively broadly based and because it almost fully offset the sizeable 1.8% drop in August. As well, the gain augurs well for September GDP to increase following disappointing numbers in the previous two months, with GDP unchanged in July and down 0.1% in August.
A recovery in activity in September is key for the Canadian economy to return to positive growth in the third quarter. Our current forecast assumes that this will barely be the case, with the economy eking out an annualized gain of only 1%. This would represent a marked improvement from declines of 6.1% and 3.4% in the first and second quarters, respectively, but it is still indicative of weak economic conditions.
With this pace of growth not sufficient to put sustained downward pressure on the unemployment rate, the Bank of Canada will be in no rush to start tightening policy. We expect that the central bank will be able to adhere to its conditional commitment of leaving the overnight rate unchanged at 0.25% through the end of the second quarter of 2010.
