Statistics Canada has just released capacity utilization rates for first-quarter 2008 for Canadian industry. The news is not good and adds to the list of indicators suggesting a marked slowdown in the overall economy.

The current slowdown/recession in Canada is being brought to you by weak U.S. demand for homes, cars and a host of other consumer and business goods (with serious implications for many products made in Canada), plus the climb in value of the loonie to hit parity with the U.S. dollar. The front line battle is being waged over exports and imports and Canadian manufacturers have been giving up valuable ground.

Definition of the Utilization Rate and the Latest Cause of Decline
The capacity utilization rate of an industry is the actual level of production versus the full-potential level. It can rise or fall depending on the production level and/or additions to or subtractions from capacity. The most recent period has not been one of huge additions to capacity. Owners have been holding back on investments due to worries about the effects on their business from the rise in value of the Canadian dollar. Therefore, recent declines in the utilization rate are mainly due to production cutbacks.

Total Canadian industry operated at 79.8% of its capacity in this year’s first quarter. This was its lowest utilization rate in fifteen years. It was a decline of 2.0 percentage points from the previous quarter. Furthermore, it was 7.3 percentage points below the most recent peak of 87.1% in the fourth quarter of 2000. Total manufacturing capacity dropped back to 77.2% in the latest quarter, the first time it has been below 80.0% since 2001.

Too Few Increases in Operating Rates
As can be seen from the accompanying charts, only one industry aggregate had an increase in its capacity utilization rate in the latest quarter versus the final quarter of last year − oil and gas extraction, at +-0.8. This was due to higher crude oil output, as natural gas production declined in the period.

Only one durable or non-durable sub-sector of manufacturing had a capacity utilization rate increase in the latest quarter − leather products, at +0.6. This left leather products at 84.9% of capacity, a quite strong performance relative to other product areas.

Largest Quarter-to-quarter Declines were all tied to Export Markets
The largest quarter-to-quarter declines in operating rates were all tied to export markets. Non-metallic mineral products (glass and cement) fell 6.7 percentage points and wood products dropped 6.0 percentage points. Both of these were hurt by weak U.S. housing markets.

Transportation equipment fell back by 6.0 percentage points and plastic products (e.g., parts for vehicles) by 4.9 percentage points. Also figure in rubber products (e.g., tires), down by 3.6 percentage points, and one gets a sense of how much the overall decline in U.S. demand for autos has hurt Canadian producers.

Aircraft production is another subset of transportation equipment along with autos and it has achieved level export sales so far this year versus last year. However, this may be about to change given the large increases in aviation fuel costs that are creating turbulence for the finances of the world’s airlines.

Leaders and Followers in Terms of Absolute Levels
As for absolute levels of capacity utilization rates, only one aggregate and three sub-sectors are operating at or above 85.0%, which is usually taken to be the benchmark figure for firms in an industry to seriously consider expanding. Electric power generation operated at 86.8% of capacity in the first quarter, paper manufacturing was at 85.3%, primary metals were at 91.8% and computer equipment was at 84.8%.

Ongoing high operating rates in the electric power industry are a prime reason, along with the potential for export sales, for the spate of mega electric power expansions that are planned by utilities across the country.

The high operating rate in primary metals reflects strong worldwide demand for steel. It also augurs well for major expansions in aluminum-making capacity in Québec and British Columbia.

Wallowing in excess capacity were eight industries operating below 75% of capacity − textile mills (63.7%), wood products (64.8%), clothing (65.2%), plastics (66.2%), beverages (68.6%), electrical equipment and appliances (72.0%), non-metallic minerals (72.2%) and furniture (74.2%).

Machinery and Equipment Industry Tells an Interesting Story
Finally, the machinery and equipment industry tells an interesting story. At 80.7% of capacity and a quarter-to-quarter decline of only 1.8 percentage points, it has hung on fairly tenaciously, given that there has been a significant increase in imports in some key areas. For example, imports of excavating machinery are +14.6%, January through April of this year versus the same period last year, and imports of agricultural machinery, including tractors, are +9.9% in current dollar value.

Outlook for Investment and Construction
The generally low operating rates, the implications for weak profit performance, the declines in goods export sales and the continuing projection of loonie-greenback parity all leave one with little enthusiasm for investment and construction prospects from the manufacturing sector over the year ahead in Canada.

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