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Declining crude oil and coal prices resulted in an extremely disappointing report on domestic manufacturing sales Tuesday. This does not bode well for the release of Canadian gross domestic product growth on May 31.
Manufacturing sales were reported 0.3 per cent lower for March, when economists expected a gain of 0.5 per cent. Adjusting for commodity prices, sales inched higher by 0.2 per cent but the most forward looking aspect of the release, new orders, fell 2.2 per cent.
Manufacturing sales provides the denominator for an Inventory to sales ratio (I/S) that has accurately predicted the course of domestic GDP (see chart). The correlation between I/S and GDP is actually a bit higher than even housing prices.
Economists have yet to post their GDP estimates for the Statistics Canada report at the end of the month. We'd assume that today's manufacturing data, combined with a weak U.S. Industrial Production release today (-0.5 versus -0.2 expected), means that GDP guesstimates for 2013 will be revised lower.
The Canadian manufacturing sector is not well represented in the S&P/TSX Composite benchmark but it contributes almost three times as much to GDP as the mining and energy sectors combined. Manufacturing is key to the country's overall growth and for now, the signs are not terrific.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.
Scott Barlow