Canadian June Manufacturing Sales Down 0.5%

• Manufacturing sales dropped 0.5% in June 2013, which was below market expectations for a 0.3% gain, and followed a revised 0.6% (was 0.7%) gain in May.

• Weakness was relatively broadly based in June with sales down in 16 of 21 industries. Partial offset was provided by 7.4% and 10.1% jumps in the volatile petroleum and coal, and aerospace components, respectively.

• There was seemingly little effect on manufacturing sales from the flooding in Alberta in June with sales in that province actually posting a 0.1% increase in the month although some offset may have come from higher prices.

• Controlling for the effect of prices, the volume of manufacturing sales dropped 1.3% following a 0.6% (revised from 0.7%) gain in May. Inventories declined once again in June, although by a smaller 0.2% than the 0.4% drop in May.

Canadian manufacturing sales declined by 0.5% in June 2013, which was below market expectations for a 0.3% increase, and followed a 0.6% increase (revised from 0.7%) in May and a 2.3% (was 2.1%) drop in April. Weakness was broadly based across components with 16 of 21 industries posting declines. The greatest sources of weakness were a 6.5% drop in fabricated metal sales and a 20.2% plunge in the “miscellaneous industry”. Offsets were provided by 7.4% and 10.1% jumps in the often volatile petroleum and coal, and aerospace components, respectively. The rise in the petroleum and coal component reportedly reflected refineries increasing production following slowdowns for maintenance work in prior months. This was enough to offset any negative effect that flooding in Alberta may have had on refining activity in that province in the month.

Controlling for the effect of prices, the volume of manufacturing sales dropped an even greater 1.3%, which more than retraced a 0.6% (was 0.7%) gain in May that followed a 1.6% (was 1.4%) drop in April. With the June decline, the volume of manufacturing sales dropped an annualized 3.2% in the second quarter, thereby marking the fourth consecutive quarterly drop. Inventories of manufactured products also declined in June; however, the 0.2% dip was smaller than the 0.4% decline recorded in May.

Going into today’s report, we expected that flooding in Alberta may have had a significant effect on manufacturing sales in June. In the event, the effect appears to have been limited with sales in Alberta actually posting a 0.1% increase in the month. The decline nationally was led by a 1.9% drop in Ontario and a 4.5% drop in British Columbia.

Weakness in manufacturing sales in June was disappointing, particularly given that little of the weakness appears to have been the result of temporary disruptions due to severe flooding in Alberta in the month. The effect from this factor may be more evident in the mining component of GDP. Along with a drop in construction activity caused by a strike in Quebec, the expected decline in mining activity and today’s weakness in manufacturing are consistent with our expectation that GDP fell by 0.3% in June, which would be down from a 0.2% gain in May. The drop in monthly activity will limit the pace of GDP growth in the second quarter as a whole to a 1.7% rate, which would be down from 2.5% in the first quarter; however, we continue to expect that June weakness will ultimately prove transitory rather than fundamental. We expect that improving US demand will allow for some improvement in the manufacturing sector in the second half of the year while a rebound in construction activity in Quebec and a boost in activity associated with rebuilding from the Alberta floods will contribute to a 3.4% rebound in growth in the current quarter.

 

RBC

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