• Manufacturing sales fell 1.3% in July
  • Excluding price-effects, sales fell 1.6%
  • Transitory factory shutdowns explain some but not all weakness

Part of the headline decline in manufacturing sales in July – which built on a similar-sized 1.4% drop in June – reportedly was due to transitory disruptions to output in the steel and auto production industries, both of which saw sharp monthly declines. But excluding those components, sales still fell 0.4% and declines were posted in 11 industries in total. New order volumes fell by 1.6% month-over-month and the inventory-to-sales ratio rose to a new cycle high – hardly positive for near-term growth in the sector.

The drop in July sales was larger than expected, but softer activity in the sector in general is not. The US manufacturing sector has been significantly impacted by rising tariff costs as a result of the escalating US-China trade dispute. At least some of that softness was bound to spill over to Canada at some point. The question, in terms of the broader economic growth backdrop, is how much the other 90% of the economy that is not the manufacturing sector can fill the hole. The trade war has also pushed interest rates sharply lower which, combined with still-strong labour markets and rising wages, has left a better household income backdrop than was expected even several months ago. Retail spending numbers this Friday will be our next clue as to the extent that offset is developing. For now, we continue to expect a 1.8% increase in Q3 Canadian GDP.

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