Stronger dollar squeezes profits: New StatsCan study

OTTAWA – There is a widening gap in the growth of manufacturing shipments between Canada and the U.S., according to a new study in the Canadian Economic Observer, Statistics Canada’s monthly economic publication.

For the past year, manufacturers have been somewhat pessimistic about their future, as shipments and orders stagnated while inventories piled-up, says the study, which is titled “Is Canada’s manufacturing lagging compared with the U.S.?”

From September 2004 (when the divergence began) to August 2005, the gap between the growth in U.S. and Canadian shipments was 5.2 percentage points, with current dollar shipments up 5.5 percent in the U.S. but only 0.3 percent in Canada. In total, 14 of 21 industries contributed to this divergence. The most important contributions were recorded for transportation equipment, wood products, petroleum, chemicals and food, some of Canada’s largest manufacturing industries, according to Stats Can.

The gap between the growth of Cnd and US shipments
is due to differences in the prices of manufactured goods

Much of the gap between the growth of shipments in Canada and the United States over the past year is due to differences in the prices of manufactured goods as they leave the factory gate.

“In constant dollars, when the effect of prices is eliminated, the growth in Canadian shipments closely matched the pace set south of the border. The gap between the volume of U.S. and Canadian shipments is practically nil (only 0.3 percentage points). In fact, constant dollar shipments in Canada outperformed the United States in 11 of 21 industries,” states the report.

The recent appreciation of the Canadian dollar has resulted in lower Canadian producer prices. Manufacturers themselves export close to half of all shipments, especially in industries that include motor vehicles, machinery, pulp and paper, and wood products. Prices for these goods are usually quoted in U.S. dollars.

“Since these Canadian manufacturers get paid in U.S. greenbacks, they received fewer Canadian dollars for their U.S. dollars when the exchange rate rose. While earnings were falling, the cost of inputs remained the same (except for imported investment goods).” The study continues.

While price differences were the largest factor, structural differences explain most of the remainder of the gap in the growth of shipments, particularly for computer and electronic products.

So, while overall shipment volumes are keeping up with those in the U.S., one area where Canada’s factories are lagging is in profits. From their low in 2002 to 2004, manufacturing profits increased 191 percent in the U.S. compared to only 19 percent in Canada. “This may reflect the severe squeeze on prices from the stronger dollar.”

The complete study is now available for free at www.statcan.ca/english/ads/11-010-XPB/features.htm. It is also included in the December Internet edition of Canadian Economic Observer, Volume 18, no. 12 (11-010-XIB, $19/$182), which is now available.