Global shipping costs and delivery times are on the decline. This has contributed to the price of goods manufactured in Canada declining for the third straight month in July, leading to a decline in nominal manufacturing sales.
After manufacturing sales volumes increased last month, volumes ticked up again in July, according to the Conference Board of Canada’s most recent manufacturing survey. In dollar terms, Canadian manufacturing sales fell by 0.9 percent (month over month), the third straight monthly decline, but rose by 17.5 per cent (year over year) in July.
Nominal sales (m/m) fell in 12 of the 21 manufacturing subsectors. The largest drops were in primary metal (minus 9.9 percent), petroleum and coal products (down 5.3 percent) and furniture and related products (minus 11.2 percent). Meanwhile, food (up 2.5 per cent) and motor vehicle parts (plus 10.7 percent) posted the largest increases.
The Board suggests this a sign that the global factors holding back real manufacturing growth are beginning to dissipate. Still, downside risk remains as unpredictable lockdowns in China create the potential for future bottlenecks.
The Board went on to say that rising interest rates and falling purchasing power will dampen consumer spending on durable goods. With uncertain economic conditions on the horizon, Canadian consumers will look to delay spending on big-ticket items, which often require loans, over the next few quarters. That will be bad news for domestic sales across several industries, like appliances and auto manufacturing. But with pent-up demand remaining in the U.S. market, the domestic decline in sales will be outweighed by increasing exports.
Inventories at record highs
Manufacturing inventories have been on a near-continuous increase since January of last year, reaching new record highs with each passing month. High prices for raw materials, the largest component of inventories, have been the main contributor to inventory increases, the Board said. But inventories of raw materials increased in July even as prices fell by 7.4 percent.
With supply chain woes easing, the current backlog of orders will begin to make its way through the system. That will lead to inventories of finished goods and goods-in-progress falling. And with firms dipping into inventories to meet demand, production levels will fall, dragging down economic growth.