Manufacturing GDP Analysis – May 2016

Fort McMurray fires drive the Canadian economy down in May

The release of May's GDP numbers offers the first look at the direct impact of the Fort McMurray wildfires on the Canadian economy. The news is not good. The city-wide evacuation and shutdown of operations at oil sands production facilities and refineries had a profound effect on the national economic picture, driving Canadian GDP down by 0.6 per cent compared to April. That represents Canada's worst month-over-month decline in more than seven years - back to the heart of the 2008-2009 economic and financial crisis.

While provincial-level GDP data are not available on a month-to-month basis, the links between this dismal GDP report and the fires is clear. GDP in the energy sector fell by 6.6 per cent in May, including a massive 13.2 per cent drop in petroleum refining. While the economic losses in northeast Alberta extend beyond the energy sector, growth elsewhere in the country was enough to offset those losses. Excluding the energy sector, Canadian GDP eked out a very small gain in May.

Disasters like these wildfires expose one of the major flaws in the calculation and use of GDP as a measure of economic activity and wealth. The loss of 2,400 buildings in Fort McMurray is sure to trigger a massive boom in housing starts and non-residential construction activity in and around the city. That, in turn, will have a strong positive impact on GDP. The problem is that the rebuilding effort does not represent new wealth being created as much as the replacement of that which burned away. GDP does distinguish between creating new assets and replacing lost ones; both appear in the numbers as unambiguously positive activities.

On an industry-by-industry basis, there were heavy losses in goods-producing industries in May, while the services sector emerged largely unscathed. Mining and energy extraction fell by 6.4 per cent, while manufacturing (which included petroleum refining) was down 2.4 per cent for the month. There were also smaller (but still significant) declines in utilities (1.8 per cent) and construction (0.7 per cent).



On the positive side, one of the largest increases in economic activity came in public administration, which was up 0.9 per cent compared to April. While the linkages are less clear, that too may be tied to the forest fires through government emergency response efforts. There were also gains in wholesale trade (1.0 per cent) and in finance and insurance (0.6 per cent).

 

Within the manufacturing sector, by far the largest decline was in petroleum refining which, as noted above, was down more than 13 per cent compared to April. There was also a sharp drop in chemicals manufacturing (3.9 per cent) as the impact of the fires spread through to petrochemicals producers.

In fact, May was a poor month for manufacturers even in industries with no direct link to northeastern Alberta. GDP in motor vehicles and parts was off 5.5 per cent and has fallen in three of the past four months. There was also a drop in aerospace value-added, which has been trending steadily downward since December.

Only two manufacturing industries saw economic activity expand in May and in both cases, the growth was simply a recovery from a dip in April. Businesses in wood products saw GDP rebound 3.3 per cent, while plastics and rubber producers bounced back 6.6 per cent.

Manufacturing GDP by Major Industry    
  Apr-16 May-16 Apr-May May 2015 - May 2016
  ($billions) ($billions) % growth % growth
Total Manufacturing 175.5 171.2 -2.4 -0.8
  Durables 99.7 97.6 -2.1 -2.8
  Non-durables 75.7 73.6 -2.8 1.5
         
Major Industries        
  Food 23.8 23.6 -0.6 5.8
  Motor vehicles and parts 18.8 17.8 -5.5 2.7
  Chemicals 14.9 14.3 -3.9 2.0
  Primary metals 14.2 14.1 -0.3 10.0
  Machinery 12.4 12.3 -0.9 -13.6
  Fabricated metals 12.0 11.8 -1.8 -9.4
  Wood products 9.7 10.0 3.3 10.0
  Plastics and rubber prods. 9.3 9.7 4.0 0.9
  Paper products 7.6 7.5 -1.0 1.7
  Petroleum and coal prods. 6.9 6.0 -13.2 -5.0
  Aerospace 6.6 6.5 -0.7 -10.3
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