If Canada found itself in the economic wilderness in the first quarter of this year (and all evidence says it did), it's in no small part because the manufacturing sector lost its sense of direction. But March's rebound in manufacturing sales signals that the sector may finally be poised to lead us out of the woods.
Statistics Canada reported Friday morning that manufacturing sales rose a smart 2.9 per cent in March from February on a seasonally adjusted basis, the biggest monthly gain since mid-2011. That's the good news. The bad news is that this came after two consecutive deep declines in January and February, during which sales tumbled more than 5 per cent.
So, March didn't even come close to making up for what was a pretty lousy quarter for a sector that most experts – including, crucially, those at the Bank of Canada – are expecting to be the key driver for Canada's economy this year. In the first quarter, it mostly drove us into the ditch. Manufacturing sales fell 2.9 per cent in the first quarter from the fourth quarter; that's nearly 12 per cent annualized. Clearly not the direction the experts had in mind.
But the rebound in the March numbers is a reminder that the first two months of the year bore some substantial asterisks. Things may not have been as bad as they looked to start the year – and they may be well on the road to getting better.
First, a wide swath of manufacturing exports was held back by miserable winter weather and U.S. port strikes, particularly in February, which stifled shipments and U.S. demand. Those have bounced back nicely with the improved weather and the end of the port disputes.
Second, the auto sector's severe slump earlier in the year was driven not only by weather issues, but by a series of maintenance and retooling shutdowns that sharply reduced output. The sector – one of the country's biggest single manufacturing components – rebounded a smart 12.8 per cent in March (after tumbling 14.6 per cent in February), but that was with only a partial return of production. The biggest retooling shutdown, at the FCA Canada (formerly Chrysler) minivan plant in Windsor, Ont., won't be completed until late May. That means auto sales have rebounded despite still operating well below full capacity – suggesting that further sales gains are almost certainly in the cards once that production returns.
Meanwhile, the March improvement went well beyond the auto-sector rebound. Sales excluding autos were up 1.9 per cent. The overall results were a bit mixed – only 10 of 21 sectors showed gains – but still, these gainers represented 60 per cent of the country's overall manufacturing output. It's also noteworthy that March's gains weren't driven at all by price increases; sales on a volume basis were also up 2.9 per cent.
Another sign that brighter days are ahead is the pickup in new orders. They rose 5.1 per cent in March, and have risen in three of the past four months. Yes, in the midst of this was a horrendous 18.5-per-cent plunge in February. But if February is, indeed, the weather-and-ports-tainted anomaly that it appears, the trend around it points to firming demand for manufactured goods.
Even the energy component of manufacturing is looking brighter, as prices firm following oil's deep slump. Manufactured petroleum and coal products – another huge component to Canada's manufacturing sales – have risen for two straight months.
Mind you, there are still areas of concern. The ratio of inventories to sales, despite declining in March to 1.41 from February's 1.45, is still elevated on a historical level. This certainly suggests no urgency for manufacturers to expand their output in the near term. But for many key manufactured exports closely tied to the U.S. economic recovery – things like transportation equipment, machinery, metals – it looks like the winter, again, was a key factor in the rise of this ratio.
Yes, manufacturing's overall first-quarter weakness strengthens the case that Canada's economy stalled in the first quarter. But pull all the pieces together, and you can make a strong case that the quarter was tainted by a series of transitory factors that have nothing to do with the underlying trend. And while the sharp rebound in March isn't likely to be repeated to the same degree in the following months, there's still some rebounding left to do. The growth trend is coming back – and with it, Canada's hopes for a brighter economy in the coming months.
David Parkinson