The latest manufacturing statistics in Canada and the US for December 2014 point to continued, albeit slow growth.
The RBC Canadian Manufacturing PMI for December 2014 indicated that business conditions continued to show a solid improvement in the month although at a slower pace relative to November. The PMI is calculated as a diffusion measure with any reading above 50 indicating improving business conditions in the manufacturing sector. The higher the reading is above the break-even level of 50, the greater is the pace of improvement. The December index of 53.9 represented a solid improvement in business conditions although at a pace below that recorded in November, which had an index reading of 55.3.
According to Nathan Janzen, an economist with RBC Economics, the December data for the survey which also provides a reading on price pressures in terms of both inputs and outputs, indicated that output prices increased at a faster pace relative to November, with the index measure rising to 52.8 from 50.6 between December and November. Respondents indicated that firms were increasingly passing along higher input costs. The survey indicated that input prices continued to rise in December, with an index reading of 54.4, which was up marginally from the 54.3 recorded in November. The fact that the index has not shown greater weakness in recent months is surprising, given the steady decline in oil prices. Respondents commented that the upward effect on input prices largely emanated from a falling Canadian dollar.
The RBC PMI is also calculated for Ontario, Quebec, Alberta and British Columbia, and the “Rest of Canada.” In December, three regions showed moderation in the pace of improvement in business conditions while the fourth, Quebec, showed a modest decline in sentiment following a slight increase in November. Specifically, the index for Quebec dropped to 49.3 from 50.3 in November. The recent decline in oil prices may have contributed to the measure for Alberta dropping to 54.7 from 55.7 in November, although it still indicated improving business conditions in the province at a relatively rapid pace. The “Rest of Canada” recorded an even greater drop to 54.7 from 57.8 between December and November. The index in Ontario dropped as well to 55.6 from 57.1 during the same period, although the province still enjoyed the fastest pace of improvement in confidence among all the regions.
he December PMI continued to indicate a solid improvement in business conditions in the month, although the pace slowed relative to November. Going forward, some downside risks are presented by the recent sharp declines in oil prices and attendant weakening in capital expenditure in the oil and gas sector. The weakness in investment is expected to be more than offset by both rising exports, responding to lower gasoline prices boosting the US economy, and strengthening Canadian consumer spending, benefitting from lower energy costs. Lower oil prices may have a material effect on regional performance, with growth in business conditions in Ontario likely continuing to outpace other regions of the country.
Manufacturing activity continues to grow in the US
Activity in the US manufacturing sector in December 2014 continued to grow, although at a slightly slower pace with the ISM measure for that sector dropping to 55.5 from 58.7 in November. Market expectations had been for a moderate easing to 57.5.
Although the ISM-manufacturing index moved lower in December, it remained at a historically high level. The average index level during the fourth quarter of 2014 of 57.7 is up from both the weather-related weakness in the first quarter of 52.7 and the index reading from a year ago of 56.7. The implied strong pace of growth in the manufacturing sector bodes well for overall GDP growth to remain at an above-potential rate in 2015. Confirmation of such is expected to contribute to the Fed returning to tightening mode. Our forecast assumes fed funds will start to rise from its current range of 0% to 0.25% in the second quarter of this year. By the end of 2015, we expect the fed funds rate to have risen to 1.00 per cent.
