Canadian Manufacturing Sales Surge in December

Canadian manufacturing sales surged 1.6% in December, building solidly on November's unrevised 0.1% gain. The strong rise in December was only slightly below market expectations for a 1.8% gain going into today's report. On a volumes basis, sales rose a slightly larger 2.1%, more than retracing November's somewhat disappointing 0.6% decline (revised from the initially reported -0.8%).

Strength in today's report was largely concentrated in the transportation industries with strong gains in motor vehicle sales (4.4%) and an outsized gain in aerospace sales (28.1%). Also adding to today's strong headline was a 2.4% jump in petroleum and coal sales. Outside of these sectors, gains were also posted in the primary metal (1.8%), machinery (3.4%) and miscellaneous sectors (7.5%). Some offset was provided by declines in food sales (-0.7%), plastics (-1.5%) and non-metallic minerals (-6.4%). In all, sales (excluding the volatile motor vehicle, aerospace and petroleum sectors) were up 0.3% during the month, building further on November's 0.7% increase.

Inventories in today's report dropped by 1.0%, building further on November's 0.2% decline (initially reported as -0.3%). This, along with the surge in sales, pushed the inventory-to-sales ratio down to 1.37 in December from 1.41 in November. Unfilled orders rose 2.3% in December following a 2.3% decline in November.

The 1.6% increase in December's manufacturing sales re-affirms our view that economic activity in Canada continued to pick up at the end of last year. With December's strong increase, manufacturing sales on a quarterly basis were up 2.2% in the fourth-quarter 2009, building on the 5.4% surge recorded in the third-quarter 2009. Furthermore, the reported 2.1% increase in sales on a volumes basis during December is encouraging following the disappointing decline recorded in November. Given today's report, we expect that the manufacturing sector helped to boost GDP for a fourth-straight month in December, consistent with our current forecast that GDP, on an expenditure basis, rose at a 4.0% annualized rate in the fourth-quarter 2009.

While economic growth is expected to be sustained at an above-potential pace throughout 2010, the recent recession has generated a large amount of economic slack as is evident in January's still elevated 8.3% unemployment rate. This excess capacity is expected to keep inflation in check in the near term and allow the Bank of Canada to follow through on its conditional commitment to maintain the policy rate at its current 0.25% rate through to the second-quarter of 2010. Beyond the second quarter, we continue to expect that the overnight rate will rise by 100 basis points by the end of 2010 with another 225 basis points of rate increases expected in 2011.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.