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Economy in Brief

Canadian Orders Show August Gains
by Robert Brusca  October 14, 2021

Canadian factory orders rose in August after two months of sizeable drops. However, this has been a period of uncharacteristic volatility for Canadian orders. The gain of 1.4% in orders in August is the smallest absolute value percentage change (smallest either positive or negative, without regard to sign) in one year. The standard deviation on monthly volatility (month-to-month percent change in orders) since February 2020 to date is 17.5%; for the nineteen-month period prior to that it is 4.5%. That means the volatility in monthly percent change is up on this period by a factor of four. Perhaps things are going to start to settle down now and provide a more normal range of monthly volatility that will render economic judgements more stable and more dependable.

On this same timeline, shipments have had a standard deviation of 9.5% compared to 1.4% in the previous 19-month period. That is an increase in volatility by a factor of seven. Unfilled order volatility has risen as well logging a standard deviation of 4.9% over the last 19 months compared to 1.8% for the earlier period- a rise in volatility by a factor of 2.6.

The virus and reactions to it have distorted economic data. Output has been suppressed by mitigation strategies. And as the virus ran hotter or colder and mitigation strategies shifted, the impact on economic data shifted as well. Economic data can almost be better understood as a gauge on the virus spread than as a statement about the economy.

Now that the virus is dissipating, and more economic activity is coming on stream (we hope), the economy should perform better and with greater consistency. Still, there are no guarantees and no guarantee that a new variant might not emerge and upset much of the progress that has already been made.

Canada's orders despite rising in August show a 41.9% annual rate of decline over three months. Still, orders are up by about an 18% pace over six months and over 12 months. The statistics on volatility tell us not to overreact to the plunge indicated by the weak three-month rate of growth. In any event, the 12-month growth rate of orders is in the 94.9 percentile (nearly top 5%) of all 12-month growth rates since January 1995 and the six-month growth rate stands in the top 86.8 percentile- even with the three-month weakness factored in.

Unfilled orders growth has accelerated. Manufacturers' shipments log quite steady and strong growth rates from 12-months to six-months to three-months. Durable goods shipments show a decline over three months and a decelerating pattern. The shipments of durables excluding autos show the same characteristics. Oddly, despite chip shortages that are impacting auto sales, Canadian motor vehicle shipments only just tuned negative in August and they are accelerating from 12-months to six-months to three-months with a massive three-months growth rate annualized at 189.8%! Canadian nondurable shipments are growing strongly and hint at accelerating with a stronger three-month pace than their year-on-year pace. Canada's manufacturing inventories grow steadily and even accelerate. The inventory-to-sales ratio (I/S) is 1.59 in August that ranks in the top 95.9 percentile of all I/S ratios back to January 1995. By comparison with the U.S., Canadian inventory growth and inventory-to-sales ratios are stunningly high. In the U.S., inventories have been depleted and inventory-to-sales ratios in the U.S. are low.

Looking at trend since just before the coronavirus struck, Canadian orders are up by 7.1% compared to January 2000. Unfilled orders are lower by 7.5%. Shipments are higher by 7.7%. But shipments of durable goods excluding motor vehicles are lower by 31%. Motor vehicle shipments, curiously, are higher by 13.1% and nondurable goods shipments are higher by 9.0%. Inventories are higher by 1.2%.

Volatility in the orders series calls for reluctance in making forward-looking statements. But progress on the virus is an important positive element. Globally the infection wave in developed economies seems to be dissipating. And this report's data show positive trends except for orders. There is both grounds for optimism and for skepticism.

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