Canadian industries, facing slumping domestic and foreign demand for their output, saw their operating rate fall from 70.2% to 67.4% in the second quarter of 2009.

This was its lowest level since Statistics Canada started keeping track of capacity utilization data in 1962.

The second quarter drop in the overall operating rate (2.8 percentage points) was less than in the first quarter (5.2 percentage points). However, it was caused by declines across the vast majority of both manufacturing and non-manufacturing industries.

Within the manufacturing group of industries, the operating rate fell sharply in primary metal manufacturing (-10.2 percentage points), fabricated metal manufacturing (-7.0), rubber (-6.8) and textile manufacturing (-11.1).

In the transportation equipment industry, a 1.2% decline in production caused its operating rate to drop by 0.9 percentage points to 46%.

In the second quarter, a 6.1% increase in motor vehicle manufacturing was more than offset by cutbacks in auto and aerospace parts production.

By far the largest contributor to the drop in the operating rate of non-manufacturing industries was mining and oil and gas.

In the mining sector, excluding oil and gas, the operating rate fell by 6.3 percentage points to a record 50.2%. Meanwhile the oil and gas segment was down by a moderate 1.9 percentage points to 76.1%.

Looking ahead to 2010, the outlook for non-residential business investment in general, and particularly non-residential industrial investment, appears likely to be severely depressed for three main reasons.

First, the steady downward trend of industrial capacity utilization over the past seven quarters indicates that it will take time before companies utilize their existing capacity to the point that they will need to add more.

Second, the precipitous 45% drop in corporate profits over the past three quarters indicates that few firms will have sufficient retained earnings to finance additional investment.

Finally, the persistence of tight lending conditions, reported by the Bank of Canada’s Q2/2009 Senior Loan Officer Survey, suggests that firms will have considerable difficulty borrowing funds to finance new initiatives.