Q2 08 Capacity Utilization Rates Low for Total Industry and Manufacturing

Second-quarter 2008 capacity utilization rate figures have just been released by Statistics Canada and they add to the growing body of evidence that the economy is slowing down. Total Canadian industry is now operating at 78.9% of capacity and manufacturing is at 76.7%. Both figures were 85% or higher a little over two years ago in first-quarter 2006.

Manufacturing job losses are not just a consequence of the rise in value of the Canadian dollar and weakening auto sector demand south of the border. Both Canada and the United States have been consistently losing manufacturing sector jobs throughout much of this decade. The year-over-year change in manufacturing employment in Canada has been zero percent or negative since late 2004. In the U.S., year-over-year manufacturing employment has been zero percent or negative since early 2000.

The reason is the notorious outsourcing and offshoring of work to lower labour-cost centres in China, Southeast Asia, India and elsewhere. This effect is unlikely to be reversed. Increased trade worldwide has kept the price of consumer goods down and has raised living standards just about everywhere, despite the readily apparent pain that comes with job losses in specific localized industries.

Only Eight Sectors in Good Health
Only eight sectors in Canada currently have capacity utilization rates that are 80% or higher: primary metal products (91.7%); computer and electronic products (87.8%); electric power (84.7%); machinery manufacturing (84.5%); paper manufacturing (83.8%); construction (83.1%); petroleum and coal products (82.9%); and oil and gas extraction (80.8%).

The high utilization rate in primary metals is due to strong demand for steel and aluminum globally. Aluminum smelter expansions will be a source of strong industrial construction activity in certain regions of British Columbia and Québec over the next several years. Computer and electronic products are continuing to sell well as consumer spending remains buoyant. Electric power supply is limited in some provinces and mega investment plans are underway to rectify the problem. Paper usage has been bolstered by some company consolidations and plant closures.

Machinery manufacturing is agriculture-related to a significant degree and has benefited from high cereal and grain prices. The construction industry has held up due to ongoing strength in housing starts, although this is about to be tested. The petroleum and coal figure is a measure of refinery capacity to supply gasoline as well as the need for coke in steel production. Finally, the oil and gas utilization rate is as low as it is due to high inventory levels of natural gas.

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