PMI indicates deterioration in operating conditions for manufacturers in May

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 A weak underlying demand profile weighed on the Canadian manufacturing sector during May. PHOTO courtesy BLM.

By Greg Paliouras

The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) slipped below the crucial 50.0 no-change mark in May for the second time in the past three months.

Posting 49.0, down from 50.2, the PMI reflected a modest deterioration in operating conditions.

Undermining the PMI in May were reductions in both output and new orders. Rates of decline were relatively marginal in both instances, with firms commenting that client budgets had been squeezed by high inflation. Spending from industry and municipal clients was said to be down. Some customers were reported to be cutting 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.

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.”

Manufacturers responded to the subdued demand environment by reducing their own purchasing activity. Buying of inputs was reported to be lower for a tenth successive month, albeit to the lowest degree since February. Firms continued to imply a preference for utilising existing stocks, rather than purchase new inputs. This was highlighted by a drop in production input inventory for a 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 on input prices, which overall fell slightly in May, and ending a near 11-year period of inflation. Lower transportation and fuel costs were reported, whilst raw material prices were said to be down in general.

Average output charges in contrast continued to increase, although 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.

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