The Bank of Canada had expected the Canadian economy to weaken considerably in the second quarter and the manufacturing sector delivered with sales contracting 2.8 percent in April, the largest monthly decrease since October 2023. Manufacturing sales reached their lowest level since January 2022, deteriorating more than the 2.0 percent decline expected in an Econoday survey of forecasters.

The decrease was driven mostly by weaker activity, as volumes fell 1.8 percent, although lower prices were also a factor with the Industrial Product Price Index down 0.8 percent on the month.

Statistcs Canada, unsurprisingly, cited businesses' feedback highlighting the impact of U.S. tariffs, with half of manufacturers reporting being affected through various channels: price increases; higher expenses for raw materials, shipping or labor; changes in demand. Tariffs appear to affect transportation equipment, primary metals and fabricated metals the most. The three subsectors saw their sales drop in April by 2.5 percent, 4.4 percent, and 3.2 percent, respectively.

Sales were broad based across 15 of 21 subsections, with durables down 2.5 percent and non-durables down 3.0 percent.

A 10.9 percent plunge in petroleum and coal led the monthly manufacturing sales decline. Global growth concerns drove down energy prices while maintenance shutdowns at major refineries dampened activity. Sales excluding petroleum and coal were still down 1.8 percent in April.

Motor vehicles sales were down 8.3 percent on the month. Excluding motor vehicles and parts, manufacturing sales contracted 2.5 percent.

Regionally, sales were down in eight provinces, led by Quebec and Ontario, the heart of Canada's manufacturing.

Inventories contracted 1.0 percent in April, reaching their lowest level since July 2022, at C$119.0 billion. The inventory-to-sales ratio increased to 1.71 from 1.68.

The manufacturing capacity utilization rate declined to 77.7 percent in April from 80.1 percent in March, unadjusted.

Looking ahead, prospects don't look bright, with new orders plunging 6.8 percent and unfilled orders down 1.1 percent.

In its June 4 monetary policy statement, the Bank of Canada warned that it expects the economy to be considerably weaker in the second quarter, with the strength in exports and inventories reversing and final domestic demand remaining subdued.

Exports are key to the health of Canada's manufacturing sector, heavily reliant on the U.S. market. In 2024, Canadian manufacturers sold half of their products to foreign buyers, 80 percent of which in the U.S. Two-thirds of transportation equipment exports went to the U.S., accounting for about a quarter of all exports of manufactured goods.

The Bank of Canada's first quarter Business Outlook Survey had already indicated that exporting manufacturers had revised down their sales expectations for this year due to the risk of U.S. tariffs, noting challenges in finding non-U.S. customers due to increased transportation costs, regulatory barriers, and limited international demand.

In its advance GDP estimate for April, Statistics Canada reported that while activity increased 0.1 percent over the month, manufacturing contracted, which today's data confirm.

Looking through the labor market lens, after cutting 30,600 positions in April, the manufacturing sector shed another 12,200 jobs in May, according to the Labour Force Survey. Statistics Canada also found in its April survey of employees that 13.2 percent anticipated the number of employees at their workplace to decrease over the next six months (not seasonally adjusted). The proportion was almost 19 percent among employees in industries dependent on U.S. demand for Canadian exports (defined as those where 35% or more jobs depend on US demand for exports from Canada).

Forecasters agree with the Statistics Canada estimate that sales fell 2.0 percent in April after dropping 1.4 percent in March.

Manufacturing sales for twenty-one reporting industries are the Canadian dollar level of factory shipments for manufacturing durable and nondurable goods. Volume figures are also provided. The sales statistics form part of a wide monthly report that encompasses information on new orders, backlogs and inventories and is a key input into forecasts of monthly gross domestic product (GDP).

Manufacturer's shipments represent the monetary level of factory shipments for durable and nondurable goods and are a relevant indicator for an export-oriented economy. The data are used by analysts to evaluate the economic health of manufacturing industries. They are also used as inputs to GDP and needless to say, these data are used by the central bank in its decision-making process.

The monthly survey of manufacturing of which shipments is a part, provides a broad look at manufacturing activity levels. The level of activity in manufacturing can be affected by the level of interest rates which slows or stimulates the demand for goods and production. Shipments are an indication of how busy factories have been as manufacturers work to fill orders. The data not only provide insight to demand for items such as refrigerators and cars, but also business investment such as industrial machinery, electrical machinery and computers. Because a large proportion of shipments are headed south of the border to the U.S. and include a wide variety of durables, shipments are affected by U.S. economic activity as well as the exchange rate. Although the focus in this report is on shipments, it also contains information on inventories and new and unfilled orders.

Results from this survey are used by both the private and public sectors including finance departments of the federal and provincial governments, the Bank of Canada, Industry Canada, the System of National Accounts, the manufacturing community, consultants and research organizations in Canada, the United States and abroad.