When the Bank of Canada released its quarterly survey of businesses across the country this past Monday, much was made of the fact that a growing number of executives say they would have some trouble meeting a surprise jump in demand.
Some of those who have argued that slack from the recession was disappearing more quickly than the central bank had said it would even pointed to the result as evidence that policy makers need to start raising interest rates soon or the economy could come dangerously close to overheating.
But Friday's manufacturing report from Statistics Canada, unfortunately, reinforces another view, which is that it's pretty hard to imagine many companies scrambling to manage a surge in demand anytime soon. Factory sales dropped 0.8 per cent in May from the previous month, Statscan said, four times as much as economists were anticipating. Much of that was due to the auto industry taking longer than anticipated to bounce back from the supply-chain disruptions caused by the Japanese earthquake and tsunami. Nonetheless, 11 of 21 sectors -- accounting for more than 70 per cent of manufacturing -- saw declines.
And don't be fooled into thinking that because unfilled orders increased, factory goods are flying off the shelf. Statscan attributed the gain to a 2.4-per-cent increase for the notoriously volatile aerospace industry; without that sector, unfilled orders actually would have fallen by 0.4 per cent. Worse, inventories rose for an eighth straight month -- to the highest level since April, 2009.
Now, it must be said, though the factory report was weaker than expected, it wasn't hugely surprising. Most economists, including Bank of Canada Governor Mark Carney, have warned for quite a while that growth in the second quarter probably slowed to an annual pace of somewhere between 1 and 2 per cent from the 3.9-per cent rate in the first three months of the year. Those same economists -- again, including Mr. Carney -- say growth is picking up and will be stronger over the second half of 2011.
That's the most likely scenario, since the drop in shipments in May was smaller than the 1.3-per cent decrease in April, suggesting the worst of the Japan hangover has passed.
Still, after another report this week from Statscan indicated that exporters were leaving the soft patch behind them a little more cleanly, the factory numbers are somewhat discouraging. More troubling, a separate report Friday shows consumer confidence in Canadian manufacturers' No. 1 market has plunged to its lowest level since March, 2009, which was arguably the scariest point of a U.S. downturn that has had more than its share of scary points, not least the current one.
Add to that the likelihood that fear and dread about the escalating debt dramas on both sides of the Atlantic could not only freeze global growth (and demand for manufactured goods) in its tracks, but also send investors flocking to the Canadian dollar, causing further problems for exporters. As David Watt, a senior currency strategist with RBC Capital in Toronto, put it to Bloomberg News this morning, "the manufacturing sector is not and won't be the source of strength for the Canadian economy for the next few quarters.''
So, yes, the worst of the soft patch may well be behind the factory sector. But those executives in the Bank of Canada survey can probably put a difficult-to-manage, unexpected spike in orders further down on their list of worries.