Construction Industry Forecasts

Many of the problems with the recessionary Canadian economy are revealed in the latest (Q2 09) capacity utilization numbers from Statistics Canada. Manufacturing in the second quarter of this year was operating at less than two-thirds of its capacity. It was the same case for forestry and logging. The mining sector was at only half of its capacity. Total Canadian industry in second-quarter 2009 had a capacity utilization rate of just 67.4%.

The problems in forestry relate to weak U.S. and Canadian housing starts. The mining sector is suffering from reduced demand for raw materials worldwide. Both of these dire situations are about to get some relief. But this will still leave the country with a major problem − how to deal with a Canadian dollar that is on the rise and inhibiting exports?

In which sectors did capacity usage stay relatively strong? It was in areas of necessity where cutbacks in demand were much harder to make, for reasons to do with health and safety. For example, electric power usage, which stays high even in the bad times, was at 78.8% of capacity. Food manufacturing (81.5%) was one of only two industries with a utilization rate above 80%. Beverage manufacturing did not fare quite so well, at 70.4%.

Manufacturing and Construction

Within manufacturing, many of the sub-sectors with the lowest utilization rates were tied to motor vehicles − transportation equipment (an almost unbelievably low 46.0%); primary metals (61.9%); plastic products (56.8%); and rubber products (60.3%).

If it wasn’t the auto sector that was in the doldrums, it was construction – due both to falling homebuilding starts and a disappearance of privately-funded non-residential building projects. There were the following low utilization rates for industries directly affected – wood products (59.2%); fabricated metal products (65.9%); non-metallic mineral products (62.8%); and construction itself (71.1%). And there were the low usage rates for industries supplying product to finished construction projects - primary textile mills (54.2%); textile product mills (e.g., rugs, carpets and curtains, 53.4%); furniture and related products (63.5%); and electrical equipment and appliance manufacturing (74.1%).

Five industries operated at what might be termed acceptable utilization rates, given the economic circumstances and the difficult times overall. These were: oil and gas extraction (76.1%); petroleum and coal products (76.7%); chemical manufacturing (72.7%); computer and electronic products (80.7%); and paper manufacturing (73.1%).

What’s the bottom line? One key indicator of expansion plans in an industry is a level of capacity utilization above 80%. With very few exceptions, this criterion is not being met by current activity levels versus what could be produced. A turnaround in the outlook for construction from most of these sectors will have to wait for several quarters at least.

Alex Carrick