A welder works in a factory in Quebec City where Quebec Premier Jean Charest announced financial support under the Plan Nord to allow a company to train northern Quebec workers, Feb. 28, 2012.Jacques Boissinot/The Canadian Press
It's tempting to look at Friday's manufacturing report from Statistics Canada as reinforcing worries that the country's industrial heartland is dying a slow death.
The reality, though, is a bit more complicated. The total value of shipments was 0.9 per cent lower in January than in December, marking the biggest drop since last April – but only the second decline in seven months.
In volume terms, sales fell 1.1 per cent, not good news for sure, but more troubling if you ignore the likelihood that this will be reversed in the next month or two as industrial production and consumer demand in the United States continue to bounce back.
In fact, Canada is already reaping the benefits of the strengthening U.S. rebound; auto sales rose for a seventh straight month in January, gaining 2.6 per cent to about $4.6-billion, which is the highest level in more than four years, and sales of vehicle parts increased by 6.2 per cent, the fifth consecutive gain. The main driver for the overall drop in factory shipments seems to be a 34-per-cent plunge in production by aerospace companies, whose activity tends to be pretty volatile. (The industry is based mostly in Quebec, explaining why the province saw a 3.9-per cent decline in sales, the biggest across the country.) And factories added 1.1 per cent to their inventories, suggesting they're relatively confident about the months ahead.
Of course, if oil prices rise much further, Canadian manufacturers – particularly auto makers – could face the double-whammy of a sudden drop in U.S. demand and an ever-stronger currency. The Bank of Canada is well aware of this, which is why Governor Mark Carney is unlikely to rush an interest-rate hike, despite signs the global economy is stabilizing, because that would send the loonie even higher.
Before this morning's report, investors were pricing in a more than 50-per-cent chance that Mr. Carney would raise rates by the end of 2012, according to Bloomberg data, a big change from just a couple of weeks ago when few believed the central bank would move before mid-2013. The January manufacturing data probably aren't the start of a negative trend, but the report might be just enough for investors to re-think that shift in expectations.