RBC PMI signals expansion in September,but at weakest pace in six months

TORONTO, Ont. – Growth of Canada’s manufacturing sector lost further momentum in September, with the weakest pace of expansion recorded since March, according to the RBC Canadian Manufacturing Purchasing Managers’ Index.

The headline RBC PMI – a composite indicator designed to provide a single-figure snapshot of the health of the manufacturing sector – registered 52.4 in September, which is evidence of a modest expansion in Canada’s manufacturing industry. However, having fallen from 53.0 in August, the rate of growth was the slowest for six months. The weaker performance of the sector was further highlighted by the quarterly average PMI reading falling from 54.3 in the three months to June, to 52.8 in the three months to September.

The RBC PMI is a monthly survey, conducted in association with Markit, a global financial information services company, and the Purchasing Management Association of Canada (PMAC). It offers an early indicator of trends in the Canadian manufacturing sector.

The RBC PMI signalled that both output and new orders increased during September, partly reflecting greater client demand. The rates of growth eased since August, however, with the latest expansion in production the second-weakest in the two-year survey history. The rate of job creation also eased, slowing to a five-month low. Inflationary pressures meanwhile picked up in September, with input prices rising strongly since August.

“All things considered, particularly within the context of the relatively weak global economic and manufacturing data, the fact that Canada’s manufacturing sector continues to expand is noteworthy,” said Craig Wright, senior vice-president and chief economist, RBC. “While it hasn’t been entirely smooth sailing for Canada’s broader economy in recent months, continued business spending and improving labour market conditions, among other generally positive factors, will help set the stage for GDP growth of 2.1 per cent in 2012.”

In addition to the headline RBC PMI, the survey also tracks changes in output, new orders, employment, inventories, prices and supplier delivery times.

Key findings from the September survey include:

§  growth of output and new orders slows to eight- and six-month lows respectively;

§  moderate rise in employment, but rate of job creation weakest since April; and

§  input prices increase strongly over the month.

Incoming new work received by Canadian manufacturers rose further in September, with a number of monitored companies attributing this to greater client demand. The volume of new export orders also increased over the month, albeit only marginally. Overall, total new orders rose moderately since August, but the rate of growth was the slowest in six months and weaker than the series average.

Manufacturing production rose in response to larger new order requirements. However, the latest increase in output levels was the second-weakest in two years of data collection. Backlogs of work and stocks of finished goods, meanwhile, were both broadly unchanged from one month previously.

The quantity of inputs bought by Canadian manufacturing firms rose further during September. Panellists commented on raising their purchases to meet the increase in output and also to rebuild input inventories, which rose at the fastest rate for four months. Concurrently, suppliers’ delivery times lengthened during the latest survey period. The latest increase in lead times on inputs was only modest, however.

Employment in Canada’s manufacturing sector increased in September, with approximately 17 per cent of firms hiring additional staff from August. Anecdotal evidence generally linked the increase in employee numbers to greater production requirements. That said, exactly 14 per cent of companies reduced their workforces over the month. Overall, the rate of job creation slowed further to its weakest in five months.

Input costs rose further in September, with fuel and raw materials such as metals and plastics particularly mentioned as having increased in price. Moreover, the rate of inflation was strong and the fastest in four months. Firms passed on greater cost burdens to clients by raising their output charges. Average selling prices rose modestly over the month, with the latest increase the strongest since April.

Regional highlights include:

§  Ontario saw the weakest improvement in manufacturing business conditions during September.

§  New order growth slowed in all four regions, with the weakest expansion recorded for Ontario.

§  The rate of job creation accelerated slightly in Alberta and British Columbia, was broadly unchanged in Quebec, but eased elsewhere.

§  Alberta and British Columbia posted the strongest rate of input price inflation in September.

“The slowdown in Canada’s manufacturing sector was partly reflective of production problems at some companies, with output increasing at the slowest pace since January,” said Cheryl Paradowski, President and Chief Executive Officer, PMAC. “However, weaker growth trends for new orders and employment, and in particular new export work, also contributed and suggest that Canada continued to be hit by ongoing weakness in the global economy.”

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Outlook 2012: Growth signals for trucking are present but so are risk factors

GRAPEVINE, Texas - The economic outlook for trucking may be as muddled right now as that for the North American economy but fears of a double dip recession are over stated the All Eyes on the Economy panel concluded at the American Trucking Associations annual conference.

Trucking is facing softening demand and rising costs but capacity should continue to remain tight making continued improvement to revenue per mile possible, according to Bob Costello, chief economist and vice president, American Trucking Associations.

"Right now freight demand is moving sideways, rather than falling off a cliff like it did in 2008. That indicates to me that we might just skirt by another recession," Costello said.

Costello was part of a panel that also included John Felmy, chief economist, American Petroleum Institute and Martin Regalia, PhD, senior vice president and chief economist, United States Chamber of Commerce. The popular All Eyes on the Economy session was moderated once again by Fox News' Stuart Varney.

Regalia echoed Costello's contention that North America would escape a double-dip recession, explaining that the weak economic data that had everyone spooked was the result of a combination of unforeseen events such as the earthquake in Japan, heavy flooding in the US and rebellions across Africa and the Middle East. Regalia expects growth in the order of 2.25% to 2.50% over the next 12 months.

 He cautioned, however, that economic growth of this magnitude is not enough to drive down unemployment, one of the major reasons behind the economic malaise in the US.

"We are not headed into double dip recession, "Regalia assured. "But we have to do more. We have to do better...The dirty little secret about economic growth is that the US economy is supposed to grow at least 2.75% per year. If you don't have that kind of growth, you don't have jobs. It's that simple."

What it seems we are headed into for 2012 is more volatility. About 70% of the US economy is dependent on consumer spending and that is only expected to grow about 2% in 2012. Our major trading partner is also getting little out of the trade sector and virtually nothing out of government spending now that stimulus packages are wrapping up and there is pressure to concentrate on austerity measures to reduce federal and state deficits.

A slow growing economy also makes for uneven and choppy progress and that is evident in the fortunes of for-hire carriers. In general, Costello said large fleets are seeing stronger volumes than smaller ones, likely because of their relationships to larger shippers.

"No one is doing great but it feels like larger companies and shippers are outperforming small business right now," Costello said.

Volumes for large TL carriers, for example, are up 11.2% from January 2009 while small TL carriers are still struggling with volumes 5.4% below January 2009. It's a similar story when examining revenues. While revenue per mile for large TL fleets has grown 9.1% since January 2009, small TL fleets are only experiencing a 3.2% gain.

Costello pointed out, however, that any growth in the current environment is a welcomed development.

"This is remarkable. We have never seen anything like this. Freight is growing slowly but we are still seeing revenue per mile growing," he said. "...There has been some growth in capacity but supply and demand remain close to equilibrium. Fleets did a good job of 'right sizing' during the recession....This industry is significantly smaller than it was a few years ago."

While growth signals are present, the risk factors are equally clear. Cost pressures in particular pose a risk for motor carriers over the next year with the inflation rate for items such as fuel, equipment and driver wages exceeding the inflation rate for the broader economy," Costello said.

Take driver wages for example. It's a sad commentary on the plight of the US motor carrier industry that drivers make no more today in real terms (taking inflation into account) than they did in 1990. Driver turnover is running at 79% on average among US carriers and was at 138% at its height prior to the recession.

"Even with unemployment over 9% many fleets are having a hard time finding drivers. For a group that is so sought after, these numbers (driver pay) will go up," Costello said.

Motor carriers face a similar situation with spending on new trucks. The average age of the US Class 8 truck fleet is approaching 7 years. Yet research shows there is a financial penalty associated with hanging on to older trucks. While maintenance costs average out to about 5 cents per mile for trucks with under 550,000 miles on them, maintenance costs rise to about 15 cents per mile once that 550,000 mile threshold is reached. Costello anticipates solid truck sales due to the significant pent-up demand for new trucks to renew aging fleets.

"We are going to have to be on a replacement cycle for quite some time," Costello said.

Cost will be challenge, however. The average sticker price for a Class 8 truck in 2006 was $95,000. Today it is around $125,000 - a $30,000 increase that somehow has to be absorbed during a weak economy.

"In this cycle, you can't forget about the cost side of the equation," he emphasized.

Diesel prices have been on a rollercoaster ride as the price of crude jumped to $115 per barrel in the spring due to strong demand from China before dropping back down to $75 per barrel as the global economy cooled.  Crude oil pricing stands at about $86-$87 right now but Felmy from the American Petroleum Institute pointed to a couple of developments that could place upward pressure on diesel pricing. He said in the northeastern US there is a push towards ultra low sulphur for heating oil, which could result in capacity issues for diesel that drive up pricing. Also, the US federal government will at some point be once again setting up its heating oil reserve, which also could lead to a supply shortage issue for diesel and drive up price.

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