Report: Canadian manufacturing sector performance contracts further in June

The performance of the Canadian manufacturing sector continued to worsen during June reportedly due to an underwhelming business environment. The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) remained below the 50.0-change mark during June. Registering at 48.8, slightly lower than 49.0 in May, the index signalled its worst performance since March.

June was the second consecutive month that registered a deterioration in operating conditions. Reportedly, there were concurrent falls in output, new orders and employment. Firms sought to adapt their operations by cutting any excess input inventory at their plants.

Relatively good news however came in the form of a survey record improvement in average lead times as pandemic-related supply-side challenges continued to dissipate. Price stability was also broadly signalled in the latest survey period.

Paul Smith, Economics director at S&P Global Market Intelligence said, “The Canadian manufacturing sector turned in another subdued performance during June, with the headline PMI remaining inside contraction territory, dragged down by further falls in both output and new orders. Reports of subdued market demand, both at home and abroad, were widespread, with clients reportedly hanging back from committing to new business given the uncertain economic outlook.”

June saw concurrent falls in both output and new orders. Firms commented that market demand was subdued, amid reports that high interest rates and the uncertain macroeconomic outlook were leading to the postponement of spending decisions by clients. Companies noted that new export orders were again down, with some firms noting lower demand from the neighbouring U.S.A.

The overall decline in new orders was steeper than that seen for production. And in a sign that the fall in new work was a little sharper than expected, Canadian manufacturers reported a marginal rise in warehouse inventories for a second month in a row. In contrast, inventories of purchases were reported to have declined for an eleventh successive survey period, and to a stronger degree. Companies signalled a preference for utilizing existing inventory, rather than buying in new inputs. This was reflected in another, very slight decline in purchasing activity over the month.

A lack of demand for new inputs continued to reduce pressure on vendors. With reports also that pandemic-related freight challenges and port congestion continued to dissipate, manufacturers signalled that average lead times for the delivery of inputs improved to the greatest degree in the survey history. Amid reports that vendors were less busy, and with less room to raise prices, average input costs increased during June only modestly. A similar development was seen for output charges, which rose modestly but at a rate below down on those seen during much of 2021 and 2022.

Meanwhile, confidence in the outlook remained positive. Firms hoped to eventually benefit from an economic recovery and reap the rewards of past investment in marketing and promotional strategies. However, confidence remained below trend, and with current production and new order volumes subdued, firms on average chose to cut their employment levels. The marginal fall in workforce numbers made little difference in firms’ ability to deal with overall workloads as backlogs of work declined for an eleventh successive month in June.

Smith added, “Elsewhere in the last report, the record improvement in vendor delivery times is on the one hand welcome news, adding to a sense of prevailing market stability following the disruptions of the pandemic. This has clearly helped to ensure that inflationary pressure remain under broad control. However, with a lack of market demand the principal factor behind the shortening of lead times, its hard to get away from the sense of subdued industrial performance heading into the second half of the year.”