TORONTO -- Manufacturing shipments rose a robust 1.3 percent in January and outpaced market expectations of a 0.9 percent gain. However, the increase only partially retraced the 3.7 percent drop in December.
On a volumes basis, eliminating the impact of price changes, shipments rose an even stronger 2 percent in January, although, once again, this only partially offset December’s 6.6 percent plunge.
The increase in January reflected relatively broad-based gains as 16 of 21 sub-sectors showed increases. In dollar terms, the increase was led by the motor vehicle sector, where activity jumped 4.5 percent. However, this only partially offset the 25.6 percent tanking that occurred in December as a result of weakening U.S. demand and the retooling of various assembly lines that caused longer-than-usual Christmas shutdowns.
Robust gains also occurred machinery (up 5.8 percent) and food manufacturers (up 1.3 percent). The main offset occurred in aerospace manufacturing where activity fell -4.1 percent.
The modest rise in shipments may not be enough for January GDP to fully retrace the sizeable 0.7 percent drop that occurred in December. However, these near-term growth considerations are being overwhelmed at the moment by the growing fallout from the U.S. sub-prime mortgage woes. The attendant illiquidity in various asset markets and upward pressure on the cost of capital both in the United States and global financial markets are the dominant issues confronting central banks.
These factors will keep central banks in Canada and elsewhere cutting interest rates aggressively and undertaking other more direct initiatives to increase liquidity in particular asset markets.
Outsized drop U.S. industrial production weather-related
Industrial production dropped 0.5 percent in February, disappointing market forecasts calling for a more muted 0.1 percent decline. Industrial production growth was unrevised at 0.1 percent in January but was upwardly revised in December to 0.2 percent from 0.1 percent. The capacity utilization rate tumbled to 80.9 percent from 81.5 percent in January.
There was a weather-related 3.7 percent drop in utilities production in February, which accounted for much of the decline in overall production. Manufacturing production dropped 0.2 percent in February. Production of durable goods fell 0.4 percent; production of non-durables also declined, falling 0.1 percent. Production of motor vehicles/parts was down 1 percent. Mining production advanced 0.4 percent in February, providing a bright spot in the report.
Despite the outsized, weather-related 0.5 percent drop in output in February, industrial production was up slightly relative to its fourth-quarter average over the January/February period. Thus, the industrial production data released so far for the first quarter are still consistent with slight growth in the economy.
Business equipment production, a correlate of capital spending, increased 0.1 percent in February, building on the 0.1 percent gain in January and the robust 0.8 percent advance in December. Over the January/February period, this component of industrial production was up an annualized 3.4 percent relative to its fourth-quarter pace, thereby pointing to positive growth in capital spending in the first quarter.
U.S. current account deficit narrows unexpectedly
The current account deficit narrowed to $172.9 billion in the fourth quarter. The market was expecting a widening in the deficit to $184 billion from the third-quarter’s originally reported $178.46 billion level. The deficit was downwardly revised in the third quarter to $177.44 billion from $178.46 billion.
The fourth-quarter deficit was the smallest since the third quarter of 2004, when it totaled $158.1 billion. The goods and services deficit widened to $177.05 billion from $172.57 billion. However, the investment income balance showed a surplus of $32.97 billion in the fourth quarter, up from $21.34 billion in the third. The fourth quarter deficit equaled 4.9 percent of GDP, down from 5.1 percent in the third quarter and was at its lowest level since the fourth quarter of 2003.
The current account deficit narrowed in the fourth quarter despite a widening in the goods and services deficit because an increase in the investment income balance was able to provide an offset.
Looking ahead, some near-term worsening of the current account balance owing to booming oil import prices is likely, although the longer-term outlook is more favorable. Export growth is expected to outpace that of imports as the past depreciation of the U.S. dollar supports the former while the latter is restrained by soft domestic demand. Hence, RBC Financial anticipates that the deficit will narrow further this year.