• Shipments edge down in April, but after robust March
• Weakness likely to reappear in H2 2007

In light of the latest spike in the Canadian dollar, the spotlight was cast on the fortunes of the country’s export-oriented manufacturing sector this morning. Despite the loonie’s 4% jump in April, markets had been betting that the two-month winning streak in shipments had extended into the early part of the second quarter. And, while April’s performance fell short of these expectations, weighed down largely by a pull-back in auto shipments, the details of today’s report were generally positive. Excluding the impact of lower factory prices in April – which have a depressing impact on the value of activity – shipments rose for the fifth month in six. On a year-over-year basis, real shipments moved into positive territory for the first time since late 2005, owing to a notable turnaround in the durable-goods industries.

Forward-looking indicators in April were also favourable. While inventories crept higher in the month, the overall inventory-to-shipments ratio remained relatively low, especially in the non-durable area. Furthermore, both new and unfilled orders (in nominal terms) turned in monthly gains and were up 5% and 15%, respectively, from a year earlier. Stripping away price impacts also leaves these metrics positive on a year-over-year basis.

Although rising orders on the books will provide support to factory activity over the near term, the sector is in for a difficult battle in the second half of 2007. For one, a good part of the latest bounce in activity reflects a temporary rebound in U.S. demand. But with ongoing housing woes likely to return U.S. economic growth to a sub-par rate in the third and fourth quarters of 2007, orders for Canada’s key exported goods are likely to slacken in tandem. On the plus side, continued brisk demand from regions such as China and Europe should provide a partial offset.

Canadian manufacturers will also continue to feel pressure from a high Canadian dollar, elevated energy prices and ongoing developing competition in areas such as auto parts, electronics and newsprint. In particular, currency impacts are normally felt with a lag, so much of surge in the currency this spring has yet to be felt.

Lastly, the outlook for a gradual softening in housing activity nation-wide will weigh on Canada’s manufacturing sector. A construction boom generates significant demand for many products, including primary metals, furniture and lumber. The likelihood of a slowing in this area will expose deeper weaknesses in manufacturing.

Putting these components together, the manufacturing sector will likely experience both weaker output and employment in the coming quarters.

Derek Burleton
AVP & Director of Economic Studies
416-982-2514