The combination of rising inventories, a restrictive credit climate and plummeting commodity prices encouraged an unprecedented number of industrial firms to put the brakes on their production in the first quarter. This observation is based on the fact that the industrial capacity utilization rate fell by 19.3% year over year to its lowest level on record.

According to Statistics Canada, reduced output of durable goods industries, particularly transportation equipment, weaker construction levels and declines in mining (exclusive of oil and gas extraction) were the major contributors to this record low level of capacity utilization.

Among the 21 industries included in the manufacturing sector, operating rates fell in 18 while within the non-manufacturing sector, capacity use fell in all but one.

Although operating rates dropped in the vast majority of industries, there were a few exceptions. In particular, the operating rate in the oil and gas extraction sector increased from 76.9% to 78.6%, its highest level since third-quarter 2007.

Other industries which saw increased capacity use included food manufacturing (from 80.3% to 81.3%), beverage and tobacco products (from 72.8% to 75.4%) and petroleum and coal products manufacturing.

Looking forward, the lacklustre growth of demand for North American motor vehicles will likely depress operating rates and profits in transportation equipment manufacturing through 2009 and into 2010.

The outlook for the oil and gas extraction industry is more sanguine. Despite weakness in first quarter profits, the increase in operating rates, steady upward pressure on petroleum prices over the past two months and an increase in investor confidence bode well for increased direct and indirect investment in the sector starting in the second half of 2009 and extending through 2010.

Industrial Capacity Utilization Rate — Total vs Oil and Gas Extraction

Data source: Statistics Canada/Chart: Reed Construction Data — CanaData.