OTTAWA, Ont. –Incoming new work at Canadian manufacturers increased at a marked pace during August, according to the RBC Canadian Manufacturing Purchasing Managers Index, an indication that Canadian business perhaps should not be as gloomy in its forecasts following yesterday’s news that the Canadian economy shrank in the second quarter.

At 54.9, up from 53.1 in July, the headline RBC PMI – a composite indicator designed to provide a single-figure snapshot of the health of the manufacturing sector – signalled a solid improvement in overall business conditions within the Canadian manufacturing sector in August. The index reading was the highest in four months, as both output and new order levels grew at sharper rates during the latest survey period.

“Canadian manufacturers received a larger volume of new work in August, with export orders recovering further from the dip recorded in June,” said Cheryl Paradowski, president and chief executive officer, PMAC. “The overall increase in new orders largely reflected greater demand and new client wins, and contributed to faster production growth. Meanwhile, panellists also recorded higher input prices, driven by increased costs for certain raw materials. That said, the rate of input price inflation has eased since July to the weakest in 2011 so far.”

The RBC PMI is conducted in association with Markit, a global financial information services company, and the Purchasing Management Association of Canada (PMAC.

“The Canadian manufacturing sector is showing renewed strength in August, as increases in new work and production levels also boosted employment,” said Paul Ferley, assistant chief economist, RBC. “Today’s report supports the view that the supply chain problems in manufacturing which arose from the natural disasters that hit Japan in March have started to reverse. This augurs well for a rebound in manufacturing activity over the second half of this year.”

The Canadian PMI is also showing much stronger results than similar purchasing managers indexes of other  major economies. Several of those indexes have dropped below 50, the line which indicates a contraction.  The eurozone PMI dropped to 49 in August. Germany was the only major economy in the  zone to have a reading above 50.  The Institute for Supply Management in the US has also  reported its index of national factory activity slowed to 50.6 from 50.9 in July. Good news is that although that’s a decline, it’s still above the contraction line and much better than expected. China’s PMI is also at 50.9, which suggests that the strong demand from last year has tailed off.

Key findings from the August survey include:

• Incoming new work increases at fastest rate since April
• Firms further boost production levels
• Rate of input price inflation eases to eight-month low

The latest expansion in the Canadian manufacturing sector partly reflected firms receiving a larger volume of new orders in August. Firms cited greater demand for their goods, as well as new client wins. Notably, the rate of expansion was the fastest in four months. Incoming new orders from abroad also increased, with a number of monitored companies highlighting the US as a key source of new export order growth.

In light of higher new order requirements, firms stepped up production in August. Moreover, survey respondents also fulfilled some new orders by depleting their stocks of finished goods for the second consecutive month.

The amount of inputs bought by firms increased during the latest survey period. Stocks of purchases also rose, albeit only marginally. Meanwhile, the average time it took for suppliers to deliver inputs to Canadian manufacturers lengthened further in August. The latest deterioration in vendor performance was marked and the strongest since May. Anecdotal evidence provided by respondents suggested that delivery delays were frequently the result of backlogs at suppliers.

Employment in the Canadian manufacturing sector increased during August. Notably, the rate of growth was the fastest in three months. Almost 22 per cent of surveyed firms hired additional staff, while 9 per cent reported job losses. Job creation was generally linked to greater production requirements.

Manufacturing companies based in Canada recorded higher input costs in August. Raw materials such as metals and petroleum-based items were particularly mentioned by respondents as increasing in price. Nevertheless, the rate of input cost inflation eased since the previous survey period, and was the weakest in 2011 so far. Panellists passed on greater cost burdens to clients by raising their output charges in August. Factory gate prices rose solidly, albeit at the slowest rate since November 2010 and at a weaker pace than that registered for input costs.

Regional highlights include:

• Regional PMI data signalled that all four broad Canadian regions registered an improvement in overall manufacturing conditions in August. The expansions were stronger than those recorded in July.
• Similarly, all four broad regions reported new order growth. Quebec, however, posted the weakest rise in new work intakes.
• Quebec was the only region to register job losses in August.
• The fastest rate of input cost inflation was recorded in Ontario. Subsequently, manufacturing companies based in that region raised their factory gate prices to the greatest extent.

The report is available at www.rbc.com/newsroom/pmi