Industrial capacity utilization rates

Industries increased their rate of capacity utilization for the fifth consecutive quarter between July and September, thanks mainly to the strength of the manufacturing sector. Industries operated at 85.7% of production capacity during the third quarter, up from 84.7% in the second quarter. The gain placed the third-quarter rate 1.5 points below the peak of 87.2% reached during the first quarter of 1988.

The industrial capacity utilization rate is the ratio of an industry's actual output to its estimated potential output. Rates have been revised retroactively to the first quarter of 1998 to reflect the revised source data.

The increase in capacity use was not accompanied by inflationary pressures. The Consumer Price Index, excluding the eight most volatile components identified by the Bank of Canada, rose 1.4% between October 2003 and October 2004.

An increase in production among manufacturers in the third quarter resulted in a significant increase in inventories. Exports declined in the wake of low international demand. Increased domestic demand was partly offset by growth in imports, which benefited from the strength of the Canadian dollar.

Higher third-quarter rates occurred in a climate of uncertainty about fourth quarter prospects. According to the latest Business Conditions Survey, manufacturers were optimistic and anticipated higher production in the final three months of the year. However, the soaring Canadian dollar in September and high input prices continued to reduce manufacturers' profits, and could have a negative impact on their production capacity. In addition, job creation has been weak in manufacturing this year despite a sharp increase in deliveries.

The increase in the rate was largely due to higher capacity utilization in 17 of 21 groups in the manufacturing sector. Rates were also up in the forestry and logging and electric power sectors. Only the construction, mining and oil and gas extraction sectors posted lower rates in the third quarter.

Fourth straight quarterly gain in manufacturing

Overall, manufacturers increased their capacity utilization for the fourth straight quarter, from 86.4% to 88.5%, with 10 of the industries in this sector posting rates over 90%. A fast-paced rise in production and a drop in production capacity were strong contributors to these high rates. While the increase was widespread, five industries in particular contributed to the growth: chemicals, fabricated metals, machinery, transportation equipment and computer and electronic products.

Capacity use among chemical manufacturers hit a record 93.9%, up 4.2 percentage points from the second quarter. Increased production of all main components in this group catapulted production 4.7% and contributed to the strong growth rate in this industry.

Among fabricated metal products manufacturers, capacity use reached 90.7%, up 4.6 points from the second quarter. It was the first time that the rate for this industry has exceeded 90%. Most of the main components of this group posted gains, especially manufacturers of architectural products and structural members.

In addition, machinery manufacturers increased their capacity use for a sixth straight quarter, as the rate climbed from 85.6% to 90.5%. This marked increase was due to a 4.7% gain in machinery production.

Capacity utilization in the transportation equipment industry continued its upward trend in the third quarter, but at a slower pace than in the previous three months. The rate rose from 89.2% to 90.9%. Higher production of motor vehicles contributed significantly to the gain in inventories in the manufacturing sector because of weak sales and exports.

Manufacturers of computer and electronic products operated at 85.1% of their production capacity, up from 81.5% in the second quarter. This was the sixth straight quarterly increase, and brought the rate to its highest level this industry has posted since the fourth quarter of 2000 when it reached 94.5%. Manufacturers of computers, communications equipment and other electronic products largely accounted for the 3.4% increase in output in the computer and electronic products industry.

Strong growth in forestry and logging in other sectors

Among other sectors, only forestry and logging, and electric power used more of their production capacity in the third quarter.

In forestry and logging, capacity use hit a record 98.5%, up 7.9 percentage points from the second quarter as output jumped 8.2%.

In the electric power sector, the rate climbed from 84.1% to 85.2% in the third quarter, as production rose 1.6% from July to September.

However, the mining and oil and gas extraction sector posted a rate of 74.8%, down from 75.5%. Increased output in the diamond, nickel and potash extraction fields was unable to offset a 44% plunge in iron ore mining caused by a labour dispute in July and August. As a result, capacity use in the mining sector edged down 0.1 percentage points to 92.3%. In the gas and oil extraction sector, the rate fell by 1.0 point to 66.1%. Output in this sector declined 0.9% despite increased oil prices.

Capacity use fell in the construction sector from 85.8% to 84.5%. A 0.4% increase in production was more than offset by the rise in production capacity.

Available on CANSIM: table 028-0002.

Definitions, data sources and methods: survey number 2821.

Data on industrial capacity utilization rates for the fourth quarter of 2004 will be released on March 10, 2005.

For more information or to enquire about the concepts, methods and data quality, contact Richard Landry at (613-951-2579) or Mychèle Gagnon at (613-951-0994), Investment and Capital Stock Division.