First Rise in Canadian Manufacturing Sales in Seven Months

Manufacturing shipments rose a solid 2.2% in February, the first monthly increase in seven months and bettered market expectations of a 2% rise. Expectations had been earlier buoyed by indications that motor vehicle production had turned up in the month along with reports of a strong gain in February exports. Eliminating the impact of price changes, the volume of manufacturing sales rose 2.6%, the first increase in real sales since September 2008.

Following extended Christmas shutdowns in the auto sector, motor vehicle sales at the manufacturing level shot up 34.5% in February and parts were up a strong 38.5%. However, Statistics Canada pointed out that the activity in the motor vehicle sector remained 40% below year-ago levels. Primary metal sales also contributed to increase, rising 3.5%. These increases helped offset declines in petroleum and coal products (3.3%) and chemical products (2.1%).

Unfilled orders, a leading indicator of future sales, were relatively flat in the month (up 0.1%), and although this represented an improvement from declines of 3.5% and 2.2% recorded in January and December, respectively. Inventories fell 1% in the month, which, along with the surge in sales, sent the stock-to-sales ratio down to 1.56 from January’s 17-year high of 1.61. This ratio had been steadily rising since a recent low in July 2008 of 1.25.

The rise in manufacturing shipments is encouraging, particularly if it gets matched by a similarly strong gain in February wholesale trade to be released next Tuesday. This augurs well for a break in a string of massive declines in GDP reported from November through January of 0.7%, 1% and 0.7%, respectively. In fact, it is possible that the February report could show a marginal gain of one or two tenths. However, these earlier declines have set up the first quarter to record a sizeable drop of close to 5 ½%, which continues to suggest some downside risk to our current first-quarter forecast of -4.4%.

Given the recent slide in employment so far this year, the Bank of Canada is expected to keep injecting monetary ease into the system to try and prevent any further intensification of this economic weakness. This could result in another cut in the overnight rate from the current 0.50% coming out of next Tuesday’s policy meeting. However, we lean more towards the Bank signalling that credit and possibly quantitative easing initiatives are being contemplated to address pressures within the financial system.

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.