Canadian manufacturing shipments surprise on the upside in November

Canadian manufacturing shipments beat expectations in November, rising 1.0% in both nominal and real terms. However, the monthly gain comes on the back of three consecutive declines with shipments (real and nominal) still down roughly 0.5% from year-ago levels and 4.2% from the peaks reached in July 2014. The inventory-to-sales ratio edged down slightly to 1.44, but remains elevated when compared to its long-run average of 1.35.

Much of the monthly gain in shipments in November was driven by motor vehicle manufacturing (+3.8%) and the very volatile aerospace (+11.5%) component. Stripping away the transportation sector, manufacturing shipments were up by a lesser 0.5%. Other industries that had above average gains in the month include clothing (+4.5%), leather and allied product manufacturing (+9.2%), electrical equipment, appliance and component manufacturing (+6.5%).

On the flipside, shipments in industries tied to commodities were down in the month, which is most likely still very much, a price story. Petroleum and coal manufacturing sales fell 0.9%, a sixth consecutive monthly decline, while chemical manufacturing was down 0.3% and primary metal and non-metallic mineral shipments were down 1.2% and 1.0%, respectively. 

Looking beyond monthly gyrations, it wasn't gloom for all industries over the course of 2015. Manufacturing of non-commodity related goods actually saw some decent momentum through much of 2015, including transportation (+11.9% y/y), food manufacturing (+4.9% y/y), beverage and tobacco (+3.1% y/y), textile mills (+7.3% y/y), paper manufacturing (+10.1% y/y), plastics and rubber products(+3.2% y/y), furniture (+7.1% y/y) and wood (+5.3% y/y).

While shipments may continue to rise in December, the pace of growth has likely moderated. The forward looking indicator, unfilled orders, was down 0.3%. In addition, aerospace shipments are fairly volatile, and the double-digit gain registered in November is unlikely to have been repeated in December. As such, manufacturing is expected to have been a drag on overall economic growth for the fourth quarter overall, holding real GDP growth to a meagre 0% to 0.5% annualized pace. The weak outlook for the fourth quarter may prompt the Bank of Canada to cut the overnight rate once again this morning.

"Much of the industries showing some positive momentum in 2015 are ones that are expected to benefit from a lower Canadian dollar, which we expect to average 68 US cents this quarter. Since there is usually a significant lag between currency depreciations and the positive knock-on effects to trade, the full benefit of a weaker loonie is still to come. As such, while the income shock from the plunge in oil prices is likely to pinch economic activity, we continue to believe that the improvement in foreign demand for Canadian non-energy related goods will provide an offset to the drop in investment in the oil patch", says TD Economics.