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Report: Canada’s manufacturing sector down in May; shows movement in positive direction

Canada’s manufacturing sector saw a modest deterioration in operating conditions in May. The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) posted 49.0, down from 50.2 in April. It slipped below the crucial 50.0 no-change mark for the second time in the past three months.

According to S&P Global, the slip is due to concurrent falls in output, new orders and employment. Anecdotal evidence pointed to the negative impact of high inflation on spending budgets. Destocking remained a common theme amongst manufacturers and their clients. Supply-side stability was reported, as pressure on vendors weakened and lead times improved for the first time in nearly four years. With demand down and supply challenges dissipating, prices paid for inputs fell slightly.

Commenting on the latest survey results, Paul Smith, Economics director at S&P Global Market Intelligence said, “A weak underlying demand profile weighed on the Canadian manufacturing sector during May, with production dropping since April and purchasing activity cut. The latter has had some further positive impact on supply chains, and with the challenges related to the pandemic now principally unwound, lead times improved for the first time in nearly four years.”

Reductions in both output and new orders undermined the PMI in May, says S&P Global. Rates of decline were relatively marginal in both instances, with firms commenting that client budgets were squeezed by high inflation. Spending from industry and municipal clients was said to be down. Some customers reportedly cut spending as they sought to lower inventories. This was common across both domestic and international markets: foreign sales fell for a twelfth successive month and at a solid, accelerated, pace.

Manufacturers responded to the subdued demand environment by reducing their own purchasing activity. Buying of inputs was reportedly lower for a tenth successive month, albeit to the lowest degree since February. Firms continued to imply a preference for using existing stocks, rather than purchase new inputs. This was highlighted by a drop in production input inventory for the tenth month in a row. However, unexpectedly low sales volumes left some firms with an excess of finished goods stocks. This helped explain the small aggregate rise in warehouse inventories at Canadian manufacturers during May.

As firms reduced their spending, pressure on vendors continued to dissipate. And amid reports that pandemic-related challenges were also subsiding, such as congestion at ports, average lead times for the delivery of inputs subsequently improved slightly for the first time since August 2019. This better supply situation helped to push down input prices, which overall fell slightly in May. This ended a nearly 11-year period of inflation.

Transportation and fuel costs were reportedly lower. Raw material prices were said to be down in general. Average output charges in contrast continued to increase. However, market competition and the drop in input costs ensured the overall rate of inflation was marginal and the lowest in nearly three years.

More positive supply-side conditions meant that firms widely expect the continued recovery of the sector from the challenges of the pandemic. Better component availability and hopes of higher sales should help to support growth of output in the next 12 months. However, worries over tighter monetary policy and the possibility of sustained inflation continued to weigh on confidence. These concerns helped explain some caution in hiring trends, with firms generally choosing not to backfill positions created by recent leavers. The net impact was a drop in employment for the first time since last October.

Smith added, “Better component availability helped to push down on input costs, which were down slightly in May and marking a noticeable turnaround from the elevated increases we’ve seen over the past three years. Whilst there remain some residual output price increases still being recorded in the sector it feels that inflation challenges in manufacturing are now coming to an end.”

Reposted from https://www.automationmag.com/canada-manufacturing-report-may-2023/

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