Manufacturing is the weakest link

Prepared by Alex Carrick, Chief Economist, CanaData

Within manufacturing, 18 of 21 industrial groupings saw lower capacity utilization rates in the latest quarter versus the previous quarter (Q3 07). Further verifying problems in this sector was the 5% decline in year-over-year employment in the latest month. (South of the border, where the manufacturing utilization rate was 79.3% in February, the picture is not really any brighter.)

One of the largest declines in plant usage occurred in the transportation sector. There were auto plant closures at the end of last year for retoolings and inventory adjustments. On an encouraging note, auto sales roared out of the gate in early 2008. Passenger car sales in January were 16% ahead of December, thanks to price discounts, lower interest rates and the Goods and Services Tax (GST) cut.

Reductions in capacity through plant closings have had an impact in some industrial areas, most notably in the forestry sector. Included here are logging operations, sawmills, the manufacture of wood products and papermaking (especially newsprint). Some plant closings have also impacted on plastic parts production for motor vehicles.

In some other key sectors, the rise in value of the Canadian dollar has had a significant detrimental effect. For example, it has reduced international demand for this nation’s machinery and electrical equipment. It has also cut into domestic textile and clothing production, which has to contend with low-cost foreign (mainly offshore) goods. On the other hand, world-wide demand (and pricing) for steel and aluminum is so strong that Canada’s primary metals sector is stretching capacity at 91.4%, the highest level among all the industrial categories.

For more articles by Alex Carrick on the Canadian and U.S. economies, visit his blog and Market Insights.

An industry's capacity utilization rate is the ratio of its actual output to its estimated potential output. Industry classifications are as according to NAICS (North American Industry Classification System). Above 85% capacity utilization, firms in an industry look seriously at expanding.

Data source: Statistics Canada/Chart: Reed Construction Data - CanaData.