Industrial capacity utilization rates

Capacity use among Canadian industries edged down in the first three months of 2006 in the wake of the rising loonie and a decline in foreign demand for some manufactured goods.

Industries operated at 85.9% of their capacity between January and March, compared with 86.1% in the fourth quarter of 2005.

Still, rates have remained relatively stable over the past two years, and are holding at near-record levels of capacity use. The first-quarter dip put the rate 1.7 percentage points below the peak of 87.6% reached in the first quarter of 1988.

The industrial capacity utilization rate is the ratio of an industry's actual output to its estimated potential output. With this release rates have been revised back to the first quarter of 2004 to reflect the revised source data.

Despite this high capacity utilization, inflation has remained modest. The Consumer Price Index (excluding the eight volatile components identified by the Bank of Canada) rose 1.6% between April 2005 and April 2006.

A decline in foreign demand for transportation equipment and non-durable goods had a negative impact on capacity utilization in the manufacturing sector. The stronger dollar and rising foreign competition created a climate of uncertainty for manufacturers. According to the April 2006 Business Conditions Survey, manufacturers expected to reduce production in the second quarter.

Rates fell in the electric power sector and the mining and oil and gas extraction sector. However, growth in capacity use in the forestry and logging and construction sectors softened the first-quarter decline.

Reduced foreign demand curtails manufacturing

Capacity use among manufacturers in the first quarter slipped from 84.3% to 84.1%.

Of the 21 industry groups comprising the manufacturing sector, 13 reduced their capacity use. However, strong results posted by the majority of durable goods industries moderated the decline in this sector.

Four sectors – transportation equipment, paper, chemicals, and furniture and related products manufacturing – were particularly instrumental in driving down the rate in the manufacturing sector. On the other hand, machinery, non-metallic mineral products and wood products manufacturing posted higher rates in the first quarter.

In the transportation equipment manufacturing sector, the rate fell from 90.4% to 88.4%. Production fell by 1.9% in this industry, as motor vehicle manufacturers sharply cut back production because of the decrease in US demand.

Paper manufacturers reduced their capacity utilization for a fifth consecutive quarter. The rate fell from 89.0% to 85.9%. Lower production levels for the majority of components in this group accounted for this situation.

Chemical product manufacturers operated at 77.8% of their capacity, down 1.5 points from the previous quarter. This was the lowest rate posted by this industry since the third quarter of 2003, when it was at 76.9%. Production cutbacks by the majority of main components in this group resulted in a 1.3% decline in production.

Capacity use fell 3.9 percentage points to 74.1% among furniture manufacturers during the first quarter. Production in this sector fell 3.8% between January and March.

The rate for machinery manufacturers rose 3.0 points to an unprecedented high of 91.8%. Construction and mining machinery manufacturers made a significant contribution to the strong results posted by this industry, as their production increased 7.8%.

Among manufacturers of non-metallic mineral products, capacity utilization jumped 6.1 percentage points to 94.9%. This marked the first time that the rate for this industry exceeded 90%. The increase in production by manufacturers of cement and concrete products contributed significantly to a 6.9% gain in the production of non-metallic mineral products.

Manufacturers of wood products ended four consecutive quarterly declines, as their capacity utilization rose from 84.7% to 87.3%. All main components of this group contributed to the increased production.

Mixed trends in the other sectors

In the mining sector, the rate fell 5.2 percentage points to 88.4%. Production fell significantly among manufacturers of potassium, and in the mining sector, where first-quarter production fell 4.6%.

In the oil and gas extraction sector, the rate slipped from 84.9% to 84.8%. The slight rise in production could not offset the increase in production capacity.

Production in the electric power sector fell 2.1%, as demand for electricity fell because of milder weather last winter. Consequently, capacity use fell from 88.0% to 85.8%.

In the forestry and logging sector, capacity utilization rose 3.9 points to 87.7%. First-quarter production in this sector was up 5.8%.

In the construction sector, the rate settled at 90.9%, up from 89.6% in the previous quarter. This was the highest rate since the first quarter of 2002, when it hit 91.2%. Residential construction, which was marked by strong growth, contributed significantly to the first-quarter growth in this sector.

Available on CANSIM: table 028-0002.

Definitions, data sources and methods: survey number 2821.

Data on industrial capacity utilization rates for the second quarter of 2006 will be released on September 11.

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