Canadian manufacturing sales disappoint in September

Canadian manufacturing sales took a tumble in September, declining 1.5%. This follows a downwardly revised contraction of -0.6% in August. In real terms, sales were down 1.6%, implying that the volume of sales was lower on the month. On a quarterly basis, the volume of manufacturing sales rose about 3.9% annualized.

Weakness was concentrated in two key manufacturing sectors. Significant sales drops were recorded in the motor vehicle manufacturing industry (-10.3%), as well as in petroleum and coal products (-7.1%). The pullback in automotive manufacturing sales comes on the heels of four consecutive months of strong sales growth; with today's report the level of sales has roughly returned to its June level.

Looking across the provinces, declines were seen in Ontario (-2.5%), Saskatchewan (-1.7%), Alberta (-1.4%), and Quebec (-1.0%), largely consistent with the declines observed at the industry level.

Inventory levels fell somewhat (-0.4%), but the marked drop in sales resulted in a rise in the inventory-to-sales ratio to 1.43 (from 1.41 in August).

On a forward-looking basis, the report was also disappointing, with unfilled orders falling 0.7% in September. At the same time, new orders were also down, decreasing 2.8% on the month.

On the surface, the August manufacturing sales numbers were disappointing. However, a pull-back in motor vehicle manufacturing was to be expected given the very strong performance in recent months that resulted in part from the resumption of output at a major manufacturing facility. For the third quarter of this year, manufacturing is expected to be a significant source of growth given its strong performance for the quarter overall. We continue to track third quarter real GDP growth in the 2.5% range.

That said, the September data provides a weak starting point for the fourth quarter, creating some downside risk to our current tracking of 2.3% growth.  

"The fundamentals for Canadian manufacturing remain strong, with the low level of the Canadian dollar making products more competitive in the key U.S. market. At the same time, the composition of growth in the U.S. is expected to remain favourable, providing additional demand support. We expect manufacturing to remain, on balance, a source of growth in the coming quarters", says TD Economics.