Sluggish US economy drives manufacturing sales down in March

The sight of January’s all-time record high in manufacturing production is fading away quickly as shipments fell for the second straight month in March. In spite of a strong recovery in petroleum refining, total manufacturing sales were down 0.9 per cent, after a revised drop of nearly 4.0 per cent in February. As a result, overall sales in March fell to their lowest level in 13 months.

The sudden and rapid decline in manufacturing activity is largely driven by a confluence of factors beyond the control of Canadian businesses. Chief among them is a weaker-than-expected US economy. Preliminary estimates suggest that GDP in the US grew by just 0.5 per cent in the first quarter of the year – its slowest pace in two years. Weak global demand and low energy prices have created enough uncertainty in the US economy to dramatically lower business investment activity across the country – especially in the mining and energy industries. That, in turn, has had a direct impact on demand for many of the goods manufactured in Canada.

Meanwhile, a recovery in oil prices in early 2016 was good news for petroleum producers, but it also quietly contributed to a stronger Canadian dollar. The exchange rate rose from an average of 70.3 cents US in January to 75.6 cents in March. That trend continued into April, with the loonie climbing to 78.0 cents. Short-term fluctuations usually do not have an immediate impact on shipments, but rapid movements in the exchange rate do wreak havoc with business planning and the value of shipments.

The result of these factors was a widespread decline in manufacturing sales in March. With the exception of petroleum refining, every major manufacturing sub-sector was down for the month. The steepest declines were in primary metals, motor vehicles and aerospace. Aerospace production was down 7.0 per cent ($122 million), reflecting in part cuts to business jet production that began last year. Aerospace activity should receive a boost in the coming months and years, however, with news of Bombardier’s contract to provide 75 C-Series jets to Delta Airlines, on top of the 45 purchased by Air Canada in February.

For their part, sales of motor vehicles and parts were down 1.8 per cent ($157 million) in March, after a decline of 8.8 per cent in February. Auto producers had been running with the pedal to the floor for much of 2015. The recent reversal of that trend is being driven by sharply lower exports – a result of the slower US economy and the challenges of exchange rate volatility. On top of that, the production surge in the auto sector contributed to a significant buildup of unsold vehicles and parts. Lower output is also a reflection of businesses drawing down their accumulated inventories.

At the provincial level, the decline in manufacturing sales in March was heavily concentrated in Ontario. While nationally, sales were down $456 million, they were down $492 million in Ontario – a decline of 1.9 per cent after a drop of 3.8 per cent in February. Lower aerospace sales also pushed manufacturing output lower in Quebec (down $159 million, or 1.4 per cent). Meanwhile, there were solid gains in BC (2.8 per cent) and New Brunswick (9.2 per cent), while higher oil prices helped manufacturers in Alberta and Saskatchewan regain some lost ground.

In spite of declines in February and March, Ontario’s manufacturing sector has been much stronger in early 2016 than it was at the same point last year. Through the first quarter of the year, Ontario’s manufacturing sales are a remarkable 9.1 per cent higher than they were over the first three months of last year. Doubtlessly, that number will fall in the months ahead, but it does serve as a reminder that recent declines in manufacturing have been from a very high starting point.