Richard Pastolero works on the factory floor at Plitron Manufacturing, Inc. in Toronto in this file photo.Darren Calabrese/The Globe and Mail
Despite a mildly disappointing March, the manufacturing sector has been a big engine for Canada's economic growth in the first quarter of 2017 – and its swelling order book and a cheap Canadian dollar suggest it could stay that way for a while. But the maturing of the U.S. economic expansion could throw some twists into how that plays out.
Statistics Canada reported that manufacturing sales rose a brisk 1 per cent month over month in March, to a record $53.9-billion. All sounds pretty positive, but you know economists (and economics columnists), they always find the black lining around every silver cloud. The growth was a bit less than economists had expected, coming after some strong export figures had suggested a bigger bounce-back from a February slump. Oh, and the February numbers were revised downward, to a decline of 0.6 per cent from an originally reported 0.2-per-cent dip.
What's more, the March bounce-back was largely a function of higher prices. On a volume basis, sales were up a decidedly modest 0.2 per cent – failing to recoup February's 0.3-per-cent volume decline.
Okay, so March wasn't the beauty it was dressed up to be. Nevertheless, it had enough going for it to build on the broader trend of strength in a sector that is critical to Canada's continuing economic recovery.
For the first quarter over all, Canada's manufacturing volumes grew at an annualized pace of 8 per cent from the fourth quarter. That's a substantial contribution to the strong first-quarter gross domestic product growth, which economists believe will clock in at close to 3.5 per cent when Statscan releases those numbers at the end of the month.
That's certainly a substantial contribution to the strong first-quarter gross domestic product growth, which economists believe will clock in at close to 3.5 per cent when Statscan releases those quarterly numbers at the end of the month.
And some of the other details suggest that trend has some legs to it.
The volume of new orders grew at a massive 20-per-cent annualized pace in the first quarter over the fourth quarter. Meanwhile, despite rising inventories, the inventories-to-sales ratio remains relatively low by historical standards – suggesting that manufacturers need to step up their production and build more substantial inventories to meet the rising demand.
Add in a weaker Canadian dollar, which provides a competitive edge for manufacturing exporters, and the potential is certainly there for the manufacturing upturn to continue.
Of course, a key to manufacturing demand will be the United States, the critical market for Canada's manufactured exports. The evolution of the U.S. economic cycle raises some interesting questions about what shape Canada's manufacturing gains will take in the coming months.
The U.S. economy's first-quarter stumble (growth of just 0.7 per cent annualized, according to the U.S. Commerce Department's initial estimate) fuelled worries about whether the U.S. recovery is running out of steam, especially given that the labour market looks very close to full employment. Of particular concern has been a stalling of consumer spending – always a critical source of U.S. economic activity, and one with obvious implications for Canadian manufacturing exporters.
In a report this week, Canadian Imperial Bank of Commerce economist Andrew Grantham theorized that the U.S. economic expansion isn't so much losing its momentum, as it is transitioning into a new phase.
"We should expect at this stage of the economic cycle to see a change in spending behaviour. That's not necessarily a deceleration or acceleration in aggregate consumption, but a shift in the drivers," he said.
In particular, he said that U.S. demand for new cars – which had been a major part of consumer spending growth until recently – typically drops off in the second half of an economic expansion. That could mean a rougher ride this year for Canada's big auto industry, often looked to as a bellwether for the manufacturing sector.
On the other hand, Mr. Grantham noted that the food and beverage segment of consumption typically thrives in the second half of an economic expansion. Notably, Canada's food manufacturing segment – which is actually bigger than the auto sector – saw its March sales jump 2.6 per cent from February, and has posted increases in four of the past five months.
U.S. business investment is also kicking in as the economic expansion moves into its next phase; Mr. Grantham said that first-quarter investment grew at its fastest pace in more than three years. That's good news for Canadian machinery manufacturers, whose sales sputtered last year amid weak business spending on both sides of the border, but picked up markedly in the first quarter, with annualized quarter-to-quarter growth of 15 per cent.
Mr. Grantham cautioned that the transition to a new phase of the expansion could mean some choppiness in U.S. consumption in the coming months, with occasional lulls quite possible. And there is, of course, the cloud of U.S. protectionism and NAFTA renegotiations, which poses a longer-term threat to Canadian manufacturers.
Nevertheless, the upturn in Canadian manufacturing looks to be on relatively solid footing – which should come in handy as the ground shifts a little.
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