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Economy in Brief

Canadian Industry Fights to Recover from Covid Issues
by Robert Brusca  July 19, 2021

As of May, Canadian orders had fallen for the second month in a row, a drop of 4% in May coupled with a 6.7% in April. These two sizeable losses are in the wake of a strong 8.6% rise in orders in March. It’s one large step forward then two sizeable steps back.

Canada had closed its borders with the U.S. in March 2020 but has since said it could open them to vaccinated Americans in August or September of 2021. Canada has been operating under various Covid restrictions in the meantime. It has strictly limited international tourism during the pandemic. Canada had various restriction in place in March and April, including a lockdown to slow the spreading ‘third wave’ of the coronavirus. Economic activity continued to be affected with the most affected sectors being services and any high-contact industry.

In addition to weak orders, shipments also fell in May (-0.6%) and April (-1.7%) after a 4.6% jump in March. Looking at the various data in Table Canada's Orders, Shipments & Inventories, March was a bounce-back month and April was a set-back month…followed by another set-back in May.

The sequential growth rates are stacked with rankings determined by the covid forces in operation over the last 12 months. With that the 12-month gains are the strongest followed by six-month gains and with three-month percentages generally the weakest and with overall orders and unfilled orders actually falling over the most recent three months.

Not surprisingly the ranking of the various measures and industries for shipments in the table show extremely strong standings for 12-month changes as activity in May one year ago was very depressed. All but three metrics in the table have top 99 percentile standings on annual growth data ranked back to 1995. The exceptions are weaker unfilled orders and a moderate 62.9 percentile standing for inventories.

Reassessing these rankings by looking at six-month growth rates changes the picture a great deal. Overall orders still run a high standing pushed ahead by motor vehicles where shipments remain very strong. But durable goods shipments excluding motor vehicles plunge to a 1.8 percentile standing- an extremely feeble reading. Unfilled orders are not as weak over six months as over 12 months in terms of their comparative standings, but they remain sunk near the lower quartile of their historic queue of data. Shipments of manufactured goods overall still manage an 89th percentile ranking. I will not review again this ranking exercise, but it is clear that there would be slippage over the last three months if a historic re-ranking were done on three-month growth rates. Clearly the 12-month to six-month to three-month procession is built on the base of weakness from the original virus strike and its stop-go impact is based on economic openings/closings since then.

This conclusion is underscored by the erratic and weak percentage changes since 1/1/2020 (the far-right hand column). Orders, unfilled orders and inventories are all lower compared to the period immediately before the virus struck with impact. Shipments of manufactured goods manage to gain 3.3% from January 2020, a period some 16-months ago. Shipments of durable goods are up wholly on the strength in motor vehicle shipments as without them durable goods shipments plunge 46% over the last 16 months.

The Canadian economy has been greatly impacted by the virus and by public policy to contain the spread and suppress hospitalizations. However, with the coverage of vaccinations having risen and with higher vaccination levels in its neighbor to the South, Canada seems ready to step up. The data on orders and unfilled orders are still somewhat confusing as it is not intuitive that orders would consistently rank so strongly while order back logs rank so weakly in an environment where shipments have been responsive only in comparison to their deepest depths of their own weakness. But what we may be witnessing is that once it becomes clear that orders could only be filled so fast - as inventories have continued to rank moderate to low - customers may have felt that piling on order backlogs simply was not healthy or in their interests. The dynamics among orders, unfilled orders, inventories, and shipments can be complicated and will be different for firms that are vertically integrated vs. those that are dealing at all stages with an arm’s length transaction.

The composite table below ranks a series of Canadian indicators through May. The low ranking (note that unemployment rates and unemployment are ranked inversely to others so that the notion of being weak applies consistently to ‘rank’ i.e. a weak unemployment rate signal is a high rate of unemployment). The data here are skewed to emphasize the goods sector but not lacking in data from the whole economy and services sector since the unemployment data are used as well as two LEI measures.

The weakest (highest rank scores) permeate the months March through June and while many of the strongest rankings are still pre-Covid (falling in January and even February of 2020) when we average the rankings across months and re-rank of the total signal across all variables, we find the recent four months score as the best four on average. The table note describes how some of the data are evaluated on levels and some on year-over-year growth rates and the use of year-on-year growth rates is certainly one of the reasons for the high ranking of current months. Despite the faltering and backtracking, we see among these metrics a fairly wide host of data evaluated in different ways for strength that indicate that Canada is successfully grappling with Covid and is on the mend.

Rank #1 indicates a strong economy signal; rank #17 indicates the weakest signal

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