Stages of Processing and Economic Trends in the Manufacturing Sector, 1988-1996

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31F0027MIE96003

Rose Cunningham and Gabrielle Zboril

Canada’s abundance of natural resources gives it a comparative advantage in producing natural-resource-based outputs such as agricultural products, commodity metals, and forestry products. However, there has long been concern that Canada is too dependent on natural resource outputs; that Canadians are "hewers of wood and drawers of water."

To address this issue, this article examines the Canadian manufacturing sector in terms of the degree of processing of its outputs. Manufactured goods are divided into three categories: first stage intermediate goods (primary processing), second stage intermediate goods and finished goods. We look at the patterns in manufacturing output and compare the data to the United States by stage of processing over the period 1988 to 1996.

The majority of manufacturing shipments is finished goods. In 1996, finished goods made up about 55% of all manufacturing shipments, compared to 40% for second stage intermediate goods, and 5% for the first stage intermediate goods. There have been small shifts in this breakdown through the period 1988-1996.

Data for the United States show a much smaller change in industrial production during the recession of the early 1990s, and more rapid growth in the advanced processing sector than the primary sector.

To conduct our analysis of the manufacturing sector, we used data on manufacturing shipments collected by the Annual Survey of Manufactures (ASM). The shipments (goods produced) were aggregated into one of three stages of processing categories based on groupings of goods used in the Industrial Product Price Index (IPPI).(1) The categories include two stages of processing for intermediate goods: first stage intermediate goods and second stage intermediate goods; and finished goods. The definitions for the three categories are as follows:(2)

First Stage Intermediate Goods: Those goods used primarily for the manufacture of intermediate goods, for example polyester fibres (that could eventually be made into fabric);

Second Stage Intermediate Goods: Those goods used primarily for the manufacture of finished goods, for example broad-woven polyester fabrics (that could eventually be made into clothing);

Finished Goods: Those goods purchased and finally consumed by the buyers as opposed to being used in further production processes, for example clothing.

The period 1988 to 1996 included some significant economic events in Canada, such as: the introduction of the Canada-U.S. Free Trade Agreement, the replacement of the 13% manufacturing sales tax with the 7% goods and services tax, a recession and a recovery. Since these events occurred, has Canada’s manufacturing sector changed? This section examines patterns in the manufacturing sector data based on three stages of processing categories: first stage intermediate goods; second stage intermediate goods and finished goods.

Overall, Canadian Gross Domestic Product adjusted for inflation, real GDP, has grown by 11.8% over the period from 1988 to 1996. The manufacturing sector real GDP grew by less, only 9.3%. There was a recession in the years 1990 and 1991, during which real manufacturing output decreased by 10.9% from 1989 levels. Before the recession, real GDP in manufacturing was $107 billion (in 1992$) in 1989. Real output in the manufacturing sector only returned to those levels in 1994. By 1996 real output in the manufacturing sector was $115 billion (in 1992$).

The Free Trade Agreement or the decreased tax on manufactured goods may have resulted in an increase in the relative size of the manufacturing sector. However, the share of manufacturing as a proportion of total GDP has remained between 16% and 18% throughout the 1988 to 1996 period. The services sector and other goods producing industries have also maintained a constant share of GDP, with 65 % to 68%, and 16% to 17% respectively.

We observe small shifts away from intermediate goods to finished goods. Finished goods accounted for 51.6% of all shipments in 1988; this increased slightly to 55.4% by 1996. The second stage intermediate goods made up 41.2% of all shipments in 1988 and their share decreased very slightly over the years to 39.8% in 1996. The less processed, first stage intermediate goods were 7.1% of manufacturing shipments in 1988 and their share decreased to 4.9% in 1996.

There is significant divergence among the stages of processing when we look at shipments during the 1990-91 recession. The more sophisticated manufactures fared much better in the recession than the less processed goods. For instance, the value of shipments for first stage intermediate goods decreased by 36% in real terms from 1988 to 1992. In fact, the real value of shipments of first stage intermediate goods in 1996 was still below 1988 levels. The second stage intermediate goods decreased by 17% in real terms from 1988 to 1992. Finished goods shipments declined by just 7% over the same period. These findings suggest that the less processed goods are more sensitive to business cycles.

The composition of manufacturing output varies greatly by region in Canada. First stage intermediate goods are the smallest category of shipments in all regions, but make up a significant share of output in B.C., Alberta and the Atlantic provinces. Intermediate goods are most significant to Quebec, B.C., Alberta and the Prairies, while finished goods are the largest category in Ontario.

For Canada as a whole, the share of shipments for the different stages of processing categories remained fairly constant from 1988 to 1996, with a slight increase in the proportion of finished goods and a decrease in the proportion of first stage intermediate goods. However, the overall trend is heavily influenced by the large provinces, Ontario and Quebec.

As shown in the previous sections, Canadian manufacturing output has varied considerably over the period we are examining. In Canada, the least processed manufactures, first stage intermediate goods have experienced the most volatility and finished goods have experienced the least volatility. We find that the U.S. did not experience as much variation in manufacturing output over the same period.

The most comparable data on manufacturing activity by stage of processing for the U.S. is the Federal Reserve Board’s industrial production indices. Their industrial production index covers manufacturing, mining, and electric and gas utilities. The index measures real output, expressed as a percentage in the base year (1992), and is computed using an annually weighted Fisher index, where the weights are based on annual estimates of value-added. The industrial production index is constructed from data from the Census of Manufacturers in the U.S. and other government publications on minerals and energy.(3)

The industrial production index is grouped in different ways, by industry group and by market group. Since neither grouping exactly matches the three stages of processing we defined for the Canadian manufacturing sector, we looked at both groupings to generate general comparisons between the Canadian and U.S. manufacturing output. The U.S. market group includes: materials, intermediate products, and final products. This group is defined mainly by how the goods are used, and so it corresponds most directly with our Canadian manufacturing stages of processing.

The Federal Reserve’s second grouping for industrial production indices is the manufacturing industry group. These categories are less similar to the definitions we used for the Canadian data since they are based on the properties of the products, rather than how the products are used.

Although there is not a strong correspondence between the stages of processing category definitions used in Canada and in the U.S., we can compare the general trends in the two countries’ manufacturing sectors.

Both Charts 2 and 3 show the same general pattern. There is a shallow decrease in real value-added in 1990-1991, corresponding to the recession, followed by strong upward growth throughout the remaining years. Chart 2. United States Industrial Production Indices for Industry Groupings (based on real value-added), 1992=100 shows the total U.S. manufacturing index and its components, advanced processing and primary processing. The total manufacturing index rose 30% in real terms over the period, with an annual average growth rate of 2.9%. Advanced manufacturing has been growing more rapidly since 1991, and has increased almost 35% in real terms over 1988-96. The primary processing component has grown 20% over the entire period.

Chart 3. United States Industrial Production Indices for Market groupings (based on real value-added), 1992=100 shows the other industrial production indices based on market groupings. These indices reflect change in real value-added for all industrial production, which includes manufacturing, mining and utilities, but where manufacturing comprises over 86% of the index. These indices (Chart 3) show more divergence among the components than the manufacturing indices (Chart 2). There has been a reversal in the relative growth rates of intermediate products and materials, as materials have overtaken both intermediate and final goods in growth of real value-added. This may be related to the strong growth in advanced processing in the manufacturing index, if the growth is in highly materials-intensive processing.

Chart 4. Canadian Index of Real Value-Added by stage of processing, 1992=100 shows the real value-added index in manufacturing for Canada over the same period. Despite the differences in Canadian and U.S. definitions for stages of processing categories, the Canadian indices are clearly much more volatile than the U.S. indices.

The Canadian real value-added trends reflect the same pattern as the general output trends discussed earlier in the report. The recession of the early 1990s affected real value-added in Canada much more strongly than in the U.S. The most dramatic changes have occurred in the less processed manufacturing categories, first and second stage intermediate goods. In Canada these categories declined the most from 1988 but they also have had the most rapid growth since 1993. This strong recovery by the first stage goods in Canada differs from the U.S. where the less processed products have continued to grow more slowly than the advanced processing category. By 1995, the real value-added for first stage intermediate goods had almost recovered the 1988 levels, but in 1996, it lost momentum and dropped close to the 1991 levels.

The other two categories have shown annual growth in real value-added since 1992 but second stage intermediate goods experienced a decrease from 1995 to 1996. The second stage intermediate goods’ real value-added showed a net growth of 9% over the entire period, and finished goods real value-added grew 17%. These rates are considerably lower than the net growth shown in the U.S. indices.

In general, we find that the Canadian manufacturing sector is not dependent on low value-added, resource-based output as over half of all manufacturing shipments are finished goods. The least processed, first stage intermediate goods make up only 5-7% of all manufacturing output. The trends point to some shifts in production toward finished goods over the least processed first stage intermediate goods.

Manufacturing value-added in the U.S. seemed to have a much less severe decrease during the recession of the early 1990s than the Canadian manufacturing sector experienced. However, finished goods manufacturing in Canada does seem less susceptible to business cycle swings. Thus shifts in Canadian production toward more finished goods could have a stabilizing effect by reducing the impact of business cycle downturns.

(1). Statistics Canada Catalogue 62-011, Industrial Product Price Indexes. Shipments data are collected at the commodity level, by Standard Classification of Goods (SCG) codes. A concordance developed by the Input-Output Division at Statistics Canada was used to map SCG codes to IPPI components. Each manufactured good (each 4-digit SCG code) was assigned to one of the three categories using the weights developed for the IPPI components. Nominal values for output and value-added were converted to real values using the implicit price indexes for GDP as shown in CANSIM matrix 6544. The commodity data used for this article are based on responses to the long form questionnaire from the ASM; these respondents account for approximately 90% of the total manufacturing shipments reported in the entire survey each year. We were able to assign 4-digit SCG codes to the stage of processing categories for at least 97% of the total manufacturing shipments reported on the long-form questionnaires for each year. Therefore, the data used for this article covers about 87% of the total value of manufacturing shipments in Canada for a given year. For further information on the methodology used in this article, please contact the authors.

(3). Federal Reserve Board. Federal Reserve Bulletin. February 1998. The Federal Reserve Board’s Internet website has statistical releases, details on industrial production index methodologies and definitions for market and industry groups. The address is www.bog.frb.fed.us/releases/G17/download.htm.

This article was written by Rose Cunningham and Gabrielle Zboril. Rose and Gabrielle are Statistics Canada economists in the Manufacturing, Construction and Energy Division.

Further information on Canadian manufacturing can be found in the publications Manufacturing Industries of Canada: National and Provincial Areas (Catalogue 31-203-XPB), available annually for $68 per issue in Canada and for $68 U.S. outside Canada, and Products Shipped by Canadian Manufacturers (Catalogue 31-211-XPB), available annually for $67 per issue in Canada and for $67 U.S. outside Canada. Order this publication and other Statistics Canada publications by telephone, dial 1-800-267-6677, by fax: 1-800-889-9734, or by Internet.

For more information about manufacturing data or time-series, call the Disclosure and Dissemination Unit, Manufacturing, Construction and Energy Division at (613) 951-9497 or by Internet: manufact@statcan.gc.ca. For information from International Trade Division telephone 1-800-294-5583 or by Internet:trade@statcan.gc.ca.

Archived Content

31F0027MIE96003

Stages of processing and economic trends in the manufacturing sector, 1988-1996

Manufacturing, construction and energy division

Rose Cunningham and Gabrielle Zboril