Canadian Manufacturing Sector Flirting with Disaster

OK, perhaps the title of this article is a bit over the top, but according to Statistics Canada, the manufacturing sector really is flirting with something–recession. And, unlike most figures, ours is not glued only to the rising Canadian dollar.

As it turned out, for the first quarter of 2006, manufacturers shipped fewer orders than expected. And, at the moment, it appears the sector has dipped into the red. Just in April, manufacturing dipped 0.3%, slowing down Canada’s overall growth for about 0.01%.

Granted, the high Canadian dollar had a lot to do with the sector’s underperformance. However, skyrocketing energy prices, costs of raw materials, and decreased spending powers south of the border had a lot more to do with it.

In addition, the sector is hemorrhaging jobs, erasing approximately 85,000 of them just last year. This translates into a drop of 3.7%, something Canada hadn’t seen since the recession of 1992. This number is particularly scary when we consider that manufacturing constitutes about 17% of the country’s overall economy.

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Although the Bank of Canada refuses to admit there is anything wrong with manufacturing, probably due to the outperforming petroleum, coal, chemicals, and primary metals, it is not just the colossal layoffs that are tripping all kinds of alarms and warning sirens. Because new shipments have decreased considerably, operating profits with the sector have also contracted by seven percent in 2005. Within the context of GDP, this is huge. And, most analysts’ are warning that this tumble is far from over.

Obviously, not all manufacturing is created equal. While oil, coal, chemicals, and metals are doing well, the biggest contributors to the sector, auto, transportation equipment, and food are simply in dire straights. To illustrate, the auto industry shrank 3.5%, while auto-parts lost 1.8% last year.

As a result, we have one confirmed contracted quarter, and the confirmation for the second one is likely on its way. If we apply a rule of the thumb that two consecutive shrinking quarters constitute a recession, well, then the manufacturing sector is in recession. And, considering that the rest of the year is not shaping up for any spectacular comebacks either, then the cliché “flirting with disaster” might not be so over the top after all.

The good news is that although the manufacturing sector is very likely in recession, it is the far cry from the recession the sector went through in the early and mid-1990s. The difference is that back then the whole country was a sinking ship. In contrast, today’s economy is much more flexible and balancing well the outperforming with underperforming sectors.