The latest RBC PMI survey pointed to a renewed downturn in the manufacturing sector, though the overall deterioration in business conditions was only marginal. August data indicated a decline in output levels for the first time in four months, while payroll numbers decreased at the joint-fastest rate since the survey began in October 2010. Meanwhile, the weaker exchange rate contributed to a modest rise in new export work. However, manufacturers reported a marked increase in imported raw material costs, which contributed to the fastest rate of price inflation in just over a year and placed additional pressure on operating margins.
A monthly survey, conducted in association with Markit, a leading global financial information services company, and the Supply Chain Management Association (SCMA), the RBC PMI offers a comprehensive and early indicator of trends in the Canadian manufacturing sector.
Adjusted for seasonal influences, the RBC Canadian Manufacturing PMI registered 49.4 in August, down from 50.8 in July and the lowest reading since May. Moreover, the headline index was below the neutral 50.0 mark for the first time in three months.
"This month's data suggests that several sectors within the Canadian manufacturing industry continue to face headwinds, with the PMI registering at a four month low," said Craig Wright, senior vice-president and chief economist, RBC. "We remain confident that, as the U.S. economy continues to strengthen and the Canadian dollar remains competitive, there will be an uptick in exports for Canadian manufacturers, offsetting some of the momentum lost in August."
The headline RBC PMI reflects changes in output, new orders, employment, inventories and supplier delivery times.
Key findings from the August survey included:
Business conditions deteriorated for the first time since May
Output and employment both decreased in August
Strongest rate of input cost inflation since July 2014
Canadian manufacturers signaled a marginal reduction in output levels at their plants in August, which ended a three-month period of expansion. Lower production volumes were linked to subdued demand patterns and efforts to reduce inventories in August. Reflecting this, the latest survey pointed to the fastest decline in stocks of finished goods since May. A number of manufacturers noted that concerns regarding the global economic outlook and falling levels of work-in-hand had contributed to inventory reduction policies at their plants.
New business volumes continued to rise in August, supported by another modest upturn in export sales. That said, the latest improvement in overall new order levels was only marginal and the weakest since the upturn began in June. Anecdotal evidence suggested that sharp declines in capital spending among energy sector clients had dampened demand during August, especially for manufacturers of investment goods.
Ongoing pressures on operating margins, alongside expectations of subdued client spending patterns, contributed to a decline in manufacturing employment for the seventh time in the past eight months. Survey respondents mainly noted that payroll numbers had been lowered through the non-replacement of voluntary employee departures.
Manufacturers also lowered their purchasing activity in August, reflecting reduced production requirements and efforts to rein in stocks of inputs. Latest data indicated a decline in pre-production inventories for the ninth successive month, with the rate of contraction the fastest since May.
Average cost burdens increased across the manufacturing sector in August, which extended the current period of rising input prices to 37 months. Moreover, the rate of cost inflation picked up to its fastest since July 2014. However, factory gate charges rose only moderately and the pace of inflation eased from July's five-month high, with pressure on margins linked to intense competition for new work.
Regional highlights include:
Alberta and British Columbia recorded a sharp and accelerated downturn in business conditions...
...while Ontario and Quebec continued to register overall manufacturing sector growth
Manufacturing job cuts were most prevalent in Alberta and British Columbia
All regions recorded strong input cost inflation in August
"Canada's manufacturing sector continues to face growth headwinds from heightened global economic uncertainty and sharp falls in energy sector capex plans" said Cheryl Paradowski, president and chief executive officer, SCMA. "Overall manufacturing output fell for the first time in four months, with softer demand for investment goods appearing to offset a gradual export-led recovery in consumer goods production. The inventory cycle acted as an additional drag on business conditions in August, as manufacturers opted to fulfill orders from existing stocks and cut back on their own input buying in response to the uncertain demand outlook."
