Manufacturing sales fell a disappointing 0.9% in July following a 0.1% decline in June (revised from the initially reported 0.1% gain). This result was well below market expectations for a 0.2% rise. Eliminating the effect of prices, the volume of manufacturing sales fell 1.0%, following a downwardly revised 0.3% gain in June (initially reported as 0.7%). The drop in the volume of sales was the first in five months.
The bulk of the decline in nominal sales was concentrated in a larger than expected 8.0% drop in motor vehicle sales, along with weakness in furniture (-10.7%) and paper (-5.5%) sales. Rising machinery (1.2%), computer and electronics (1.7%), and food (1.2%) sales provided some offset; however, the majority of the remaining components dipped in the month. In all, sales fell in 12 out of 21 industries in July.
In terms of other components of the report, inventories rose 0.3% in July following a 0.6% gain in June. This, along with the decline in sales, pushed the inventory-to-sales ratio up to 1.33 from 1.32 in June. Unfilled orders dipped for the first time in three months, falling 1.1% in July after posting 1.4% and 2.3% gains in June and May, respectively. Rising sales in Manitoba and Alberta were not enough to offset declines in Saskatchewan, British Columbia and Quebec.
The decline in the volume of sales in July is disappointing and suggests that manufacturing will likely act as a drag on overall GDP growth, in the month after acting as a solid support in June. The drop in volumes likely reflects some of the earlier reported weakness in exports in the month that, along with a rise in imports, resulted in a much larger than expected trade deficit in July. It is still to be seen whether the weakness in exports will be evident in wholesale sales as well; nevertheless, the gain in imports may also be reflected in stronger growth in retail sales. With that said, today’s report by itself suggests that monthly GDP growth in July will likely be below the 0.2% June gain, although we still expect a positive reading. If realized, it would suggest downside risk to our current forecast that GDP growth on a quarterly expenditure basis will pick up to a 3.0% annualized pace in the third quarter of 2010 from the 2.0% gain recorded in the second quarter.
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