Canada Manufacturing Shipments Increased In September

In September, manufacturing shipments registered a 0.4% increase in both nominal and real terms. That was roughly in line with consensus. However, the prior month’s growth was revised down from 1.5% to 0.9%. Sales were up in just 8 of the 21 broad industry sectors. One in particular – aerospace (+43%) – boosted the overall results. The next leading contributor was petroleum/coal products (+1.2%).

The advances more than offset sharp declines elsewhere, including by autos and machinery. New orders jumped 2.2% after crawling up 0.2% the month before. However, these consecutive increases did not make up for the 4.5% drop in July. The shipments report looked good at first glance but lost its lustre upon closer scrutiny. The downward revision to the previous month’s showing was not good news. Moreover, strength in September was concentrated in just a few sectors.

The increase in volumes seems to be a positive for September GDP although it is worth reminding that, as we found out in August, the monthly report might not be reliable for gauging factory contribution to GDP. We continue to expect GDP growth in Canada to come in below 1% in Q3.

United States – In October, retail sales sagged 0.3%. However, the prior month’s growth was revised up from 1.1% to 1.3%. Auto sales fell 1.5% thus reversing most of September's gains. Excluding autos, sales were flat as declines in sales of furniture, building materials and electronics were essentially offset by increases in other categories, including gasoline (+1.4%). Discretionary spending (i.e., retail sales excluding gasoline, groceries, health/personal care) slipped 0.8% (not surprising given the drop in auto sales), although this came on the heels of a sharp 1.2% rise the previous month.

Following the upward revision to the prior month’s number, the October report was roughly in line with expectations. With one month of data in, U.S. real retail spending growth is tracking at an annualized rate of just 0.6% in Q4, a significant moderation from Q3's pace of 4.1%. However, the tepid spending growth in the month does not necessarily point to a weaker consumer.

Temporary disruptions to economic activity due to "super storm" Sandy might have had a bearing on overall October sales. Retail sales may still rebound overall in Q4 to reflect continued improvement in the labour market and rising consumer confidence. Still, we remain cautious about spending because of the uncertainty being created by Congress.

Again in October, U.S. industrial production confounded consensus expectations by shrinking 0.4% instead of expanding 0.2%. Making matters worse was a two-tick downward revision to just +0.2% for the prior month. Manufacturing output contracted 0.9% with drops in all subcategories including machinery (-1.9%) and autos (-0.1%). Utilities output slid 0.1%.

The mining sector's 1.5% increase provided insufficient offset. With the slump in output, capacity utilization fell four ticks to 77.8%, its lowest point this year. The weak industrial production report can be blamed only in part on disruptions caused by storm Sandy in late October. There is no denying that industrial output was already decelerating well before the storm hit. It should be noted that, following the downward revision to September, industrial production actually pulled back in Q3 for the first time since 2009.

The same was true for the manufacturing sector, which sank 1.1% annualized in the quarter. It is now tracking at -4.4% in Q4 (based on one month’s data). For its part, IP as a whole is tracking at -2.7% in Q4 thanks to October's negative performance. This is consistent with our view that U.S. GDP growth in Q4 will peg in below 2% annualized.

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