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Manufacturing conditions improve modestly in July: RBC

Manufacturing business conditions in Canada improved for the fourth consecutive month in July; however, the rate of growth was modest and the weakest in three months, according to the RBC Canadian Manufacturing Purchasing Managers’ Index.

A monthly survey, conducted in association with Markit, a leading global financial information services company, and the Purchasing Management Association of Canada (PMAC), the RBC PMI offers a comprehensive and early indicator of trends in the Canadian manufacturing sector.

At 52.0, the headline RBC PMI – a composite indicator designed to provide a single-figure snapshot of the health of the manufacturing sector – remained above the 50.0 no-change mark for the fourth successive month in July, signalling a further improvement in Canadian manufacturing business conditions. However, down from 52.4 to a three-month low, the headline index indicated a modest expansion that was weaker than the series average.

The RBC PMI indicated ongoing growth of both output and new orders in July, with firms generally attributing this to greater client demand and new product launches. However, the rates of growth eased to three-month lows and this contributed to a weaker rise in employment. Meanwhile, firms reduced their output charges for the first time since March 2012, often linking discounting to stronger competitive pressures.

“Canada’s manufacturing sector stayed afloat in July, although conditions were slightly less favourable than on average historically,” said Craig Wright, senior vice-president and chief economist, RBC. “We expect the U.S. economy to shift into higher gear in the second half of the year, slowly increasing demand for Canada’s exports, and manufacturing goods in particular – this is good news for overall GDP growth.”

The headline RBC PMI reflects changes in output, new orders, employment, inventories, prices and supplier delivery times.

Key findings from the July survey include:

• modest increases in both output and new orders;
• weakest rate of job creation since April; and
• average selling prices fall at strongest pace in near three-year series history.
The volume of new orders received by Canadian manufacturers increased for the fourth consecutive month in July. Firms generally linked this to greater client demand, in part due to new product launches, with new export work also rising over the month. Though remaining moderate overall, the rate of total new order growth was the weakest since April.

Reflective of the latest increase in new work, manufacturers raised output and depleted existing stocks of finished goods. That said, the latest rise in production was the weakest in the current three-month sequence. Meanwhile, backlogs of work fell solidly and for the second month running.

Concurrently, the quantity of inputs bought by manufacturing companies increased during the latest survey period. Although this mostly reflected higher new orders, part of the rise in purchasing volumes was also used to build input inventories. Stock of purchases rose for the first time since October 2012, albeit only marginally.

Suppliers’ delivery times lengthened in July, after having shortened slightly in June. Nonetheless, the deterioration in vendor performance was only modest and weaker than the series average.

Employment in Canada’s manufacturing sector continued to rise in July. Approximately 17 per cent of surveyed firms hired additional staff over the month, often linking this to increases in new business. Overall, the rate of job creation was moderate, but slowed further from May’s peak to the weakest in three months.

Manufacturers faced greater input costs in July, with higher raw material prices and unfavourable exchange rates behind the latest increase. Overall, the rate of inflation was moderate and the fastest since March. In contrast, companies reduced their output charges from June, with a number of firms citing stronger competitive pressures. The reduction in selling prices was modest and the first for almost a year-and-a-half.

Regional highlights include:

• Alberta and British Columbia was the only region to see deterioration in manufacturing business conditions in July, although this was only slight.
• Manufacturers based in Ontario saw a marginal reduction in new order volumes.
• Employment increased in three regions during July, with the only exception being Alberta and British Columbia that saw broadly no change from June.
• The weakest rise in input costs was recorded for Quebec.