In August, Canada’s manufacturing pulse slowed down, while U.S. factories made small gains. This shows that the North American industrial cycle is still looking for a stable base.
In August, total manufacturing sales probably fell by 1.5%. The biggest drops were in food and transportation equipment.
The agency said that the estimate is based on a 68.2% weighted response rate and could change when the official report comes out on October 15.
Transportation equipment is a big deal for Canadian businesses, and the fact that food prices fell at the same time suggests that both capital goods and necessities producers had less demand or temporary problems.
U.S. production goes up a little
The Federal Reserve’s G.17 release showed that industrial production in the United States rose 0.1% in August after falling 0.4% in July.
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The part that matters most for factory floors, manufacturing output, went up 0.2%, while motor vehicles and parts went up 2.6%.
Total industry capacity utilisation stayed at 77.4%, with manufacturing at 76.8%. Both are below long-term averages, which is what you would expect in an economy that is growing but not putting too much strain on supply.
Mix usually helps keep margins high in industries that can set their own prices, and it also lowers the risk of overheating, which would raise borrowing costs.
Survey signals are still cautious
Survey results keep showing that the U.S. factory expansion is still weak. The Institute for Supply Management said that its Manufacturing PMI was 48.7 in August, which is still below the 50 line that separates growth from contraction.
New orders went up to 51.4, but production went down and the employment index stayed low at 43.8.
The prices index stayed high at 63.7, which means that input costs are still high.
The ISM profile shows that the sector is dealing with uneven order books and passing on costs while avoiding a bigger downturn.
Markets often ignore one month’s PMI drop when output and auto assembly are strong, but a long run below 50 tends to limit expansion in more cyclical names.
Prices for producers go in different directions
The Industrial Product Price Index went up 0.5% in August and 4.0% over the past year. Raw material prices, on the other hand, went down 0.6% in August and up 3.2% over the past year.
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Combination suggests that some producers have some pricing power, even though input costs went down slightly. This could help keep margins stable if volumes stay the same.
The Bank of Canada should be patient because producer prices are going up while factory sales are going down.
It may prefer industrials and staples with strong balance sheets over cyclicals with a lot of debt that need strong top-line growth to keep up with fixed costs.
The U.S. Commerce Department’s August report on durable goods, which is due on Thursday, will make it clearer how core capital goods orders and shipments are going.
Transportation caused a drop in headline durable orders in July, which set a low bar. If core nondefense capital goods bounce back, it would back up the Fed’s output data and help confirm ISM’s report of a small rise in new orders. If we miss, it will be up to consumption and services to keep growth going into the fourth quarter.
In the U.S., factory output went up a little, and auto assembly support suppliers for vehicles and some machinery stayed strong.
However, sub-trend utilisation and weak hiring suggest that broad-based risk-on across industries is not a good idea.
In Canada, a drop in transportation and food prices, even if it’s mostly noise, draws attention to producers who export to U.S. end markets that are still growing.
Producer price firmness rewards companies that can show they have pricing power and a wide range of inputs.
