Factory Sales Were Down 0.3% In February: April 18, 2012

Factory sales dropped 0.3% in February after a 1.3% decrease in January. Sales declined in 11 of 21 industries. Durable goods increased 0.2% and non-durable goods sales declined 0.8%. Transportation equipment, the heavyweight in durable goods, dropped 3.1% m/m with major losses coming from motor vehicle manufacturing (- 8.7%) and motor vehicle parts manufacturing (-7.2%).

New orders jumped 2.5% in February, after edging up 0.3% onemonth earlier. The increase in orders largely reflects gains in the aerospace and machinery industries. Unfilled orders rose 1.9%, a first increase in 3 months. Inventories increased 0.3% and given this month’s sales pullback, the inventory-to-sales ratio increased to 1.34 from 1.33 a month earlier. In constant dollars, manufacturing sales were barely down (-0.1%) after decreasing 1.6% in January.

Opinion

This morning’s report is in line with consensus expectations. A second monthly consecutive drop may look disturbing. However, data since the beginning of the year must put in context. This decline occurs after a 19.1% annualized surge in the second half of 2011, its best 6-month performance in 2 years, when a cyclical rebound took place following the recession. This impressive performance was due to a sharp rebound in sales of motor vehicle and parts industries. Those two sectors were however responsible for February’s weaknesses.

Otherwise, new orders were on the rise but core new orders (which excludes aerospace) a better gauge of future short-term activity is essentially stagnating since September. That said, a rebound can be expected in subsequent months given the uptick in US demand. For instance, auto assemblies south of the border are quite active to say the least and with US inventories to sales relatively low, we expect demand for Canadian autos and parts to pick up. All in all, in real terms, manufacturing activity is essentially stagnating so far in Q1 (-0.5% annualized), after being a strong contributor to growth in 2011Q4 (+10.4%).