The recent flow of Canadian economic data has had a distinct just-okayness to it, and the September manufacturing statistics were no exception. But hidden in the so-so numbers is a sign that one of the holy grails of a healthy, sustained Canadian economy – the resurgence of business investment, by now near-mythical in its elusiveness – may finally be ready to emerge.
Statistics Canada reported Wednesday that manufacturing sales, in dollar terms, were up a better-than-expected 0.3 per cent month over month, boosted by the transportation-equipment segment (strong gains in each of planes, trains and automobiles, sort of a John Candy moment). But the increase was entirely due to higher prices; sales volumes were actually down 0.2 per cent.
Since volumes speak to the level of demand, and are critical to gross domestic product growth, seeing them go backward pretty much made this manufacturing report a dud, despite the surprisingly strong dollar-sales figure. Volume sales still rose for the third quarter overall, by a decent annualized pace of 2.5 per cent, but the slippage to end the quarter provides further evidence that the Canadian economy's strong rebound from its second-quarter slump has already run out of steam. The road back to mediocrity sure was a short one, wasn't it?
But delve even deeper into the September manufacturing data, and there's something very hopeful indeed to cling to. We may be seeing, at long last, the revival of business investment. Sales of machinery – a key indicator of businesses investing in upgrading their equipment and expanding their productive capacity – were up 0.8 per cent month over month in September, after jumping 3.3 per cent in August. Over the past four months, machinery sales have surged nearly 8 per cent – that's a massive 24-per-cent annualized pace.
Sure, that kind of growth rate isn't sustainable. But at the same time, it's consistent with Canada's latest merchandise trade data, which showed a 0.4-per-cent rise in industrial equipment exports in September, part of a 7-per-cent jump over the course of the third quarter.
The implication is that business investment, having been in a frustrating fizzle on both sides of the Canada-U.S. border for much of this year, is gaining meaningful momentum. The signs of a pick-up in U.S. investment are particularly important, as that will be the critical catalyst for the long-awaited acceleration in Canada's non-energy exports that will, in turn, drive our domestic investment.
Granted, Wednesday's data on U.S. industrial production didn't, on the surface, appear to confirm that theme: Output showed essentially no growth in October. But that weakness is entirely due to declines in utilities – which has nothing to do with a soft economy, and everything to do with an unusually warm autumn, which has reduced heating demand.
Otherwise, growth abounded. The beleaguered mining sector saw output surge 2.1 per cent month over month. Manufacturing output grew 0.2 per cent, its fourth gain in five months. Capacity utilization, outside of utilities, is decidedly on the rise – a critical element in triggering business investment, as tighter capacity fuels the need for companies to expand their operations.
But perhaps the most compelling argument for a resurgence in business investment may be the turnaround in corporate profits. In the third quarter, the companies that make up the S&P 500 posted their first year-over-year earnings growth since the 2015 second quarter. Economists had warned when profits began to slump last year that business investment is an inevitable casualty of earnings recessions, and that was apparent in the middle months of this year. With profits growing again, they bring a healthier investment environment with them.
While things are looking up, it may be premature to declare that a full-fledged business investment renaissance has begun. The uncertainty surrounding the U.S. presidential election, which many observers identified as a key reason why many U.S. businesses were delaying investment decisions, has hardly evaporated with the election of Donald Trump.
But here, too, might be another source for hope: Mr. Trump wants to open the tax doors for U.S. corporations to repatriate potentially hundreds of billions of dollars in offshore profits. If even a tiny fraction of that cash flows back into the United States and gets reinvested in U.S. operations, we could be on the verge of a very healthy time indeed for business investment – and for the Canadian goods exporters who are hoping to feed it.