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Minus Forty and Minus Fifty Equals Plus Six-and-a-half (Part 2)

Dec 19, 2014

Continued from Part 1.

As good as America’s auto-sales pick-up may have been, it is being vastly exceeded in Canada. North of the border, light motor vehicle sales will reach a new all-time peak of almost 1.9 million units in 2014.

2014 12 19 Motor Vehicles_Graphic

In Canada, the disparity between “van, truck and bus” sales and passenger cars is astonishing. It hardly seems possible, but lower gasoline prices will make this disconnect more pronounced.

Nor is this a trend that’s eco-friendly. While “vans, trucks and buses” have made solid gains in fuel efficiency, they still trail passenger cars, especially those of the compact variety. 

If car sales have been turbo-charged, what has that meant for assemblers’ operations? Insight is provided by a key leading indicator, the capacity utilization rate.

I’ll answer the specific question in a moment. First, let’s take a look at what’s happening with plant usage rates in general.

In the U.S., the Federal Reserve publishes industrial production and capacity utilization rates every month. Statistics Canada calculates and disseminates comparable figures on a quarterly basis.

Capacity utilization rates become interesting only when they rise to at least 80.0%. Once they reach or surpass 85.0%, it’s time to really take notice. That’s when firms in an industry consider more seriously the need to expand their facilities.

Total U.S. industry in the latest month, November, was operating at 80.1% of capacity. Versus November of 2013, that was a climb of 1.1 percentage points.

U.S. mining and oil and gas extraction achieved a usage rate of 87.9% in November. Hydraulic fracturing technology (a.k.a., “fracking”) that has allowed greatly expanded development of shale rock deposits has brought a boom to the energy sector.

Manufacturing in November was still operating at a relatively restrained 78.4% of capacity. 

Among U.S. manufacturing’s 20 or so sub-sectors, eight are currently operating above 80.0%: petroleum and coal products (86.3%); electrical equipment, appliances and components (84.4%); motor vehicles and parts (83.8%); machinery (83.3%); paper (also 83.3%); primary metals (82.4%); food, beverage and tobacco products (81.0%); and fabricated metal products (80.3%).

You’ll notice that only petroleum and coal products is above 85.0%.   

In Canada, there were 12 manufacturing sub-sectors with utilization rates of 80% or higher in the third quarter of 2014.

Of that dozen, six were operating above 85.0%, led by transportation equipment (95.6%), which encompasses autos and airplanes. The other five were: wood products (93.9%); paper (90.3%); primary textile mills (88.4%); rubber (86.4%); and primary metals (85.1%).  

The high utilization rates for the auto sectors in the U.S. (83.8%) and Canada (95.6%) suggest the need for capacity enhancements. It may seem unfair, but this is more assured in the U.S. than in Canada.

In Canada, Ford has announced major investment spending to build new vehicle models in Oakville, Ontario. General Motors’ intentions, with respect to its operations in Oshawa, east of Toronto, remain unclear. 

Since this article is somewhat of a year-end look-back, it’s right that it should finish by circling around to the opening.

While Russia is becoming more of an international pariah, Cuba is receiving a warmer embrace. 

President Obama is unilaterally “normalizing” (there’s that word again) relations with the land made famous by the Castro brothers.

Some, but not all, banking and travel restrictions will be lifted. As a U.S. citizen, you still won’t be allowed to travel to Cuba on your own to sunbathe on Varadero Beach.

As the island will be opened up to American business conventions, however, you will be able to see the sights while attending a function as a delegate.

Such is the way diplomats negotiate significant change.

Motor Vehicle Sales in the U.S.
(12-month moving totals)

Motor Vehicle Sales in the U.S.

Based on not seasonally adjusted (NSA) numbers.
Data source: U.S. Bureau of Economic Analysis (BEA)
Chart: CMD.

Motor Vehicle Sales in the Canada
(12-month moving totals)

Motor Vehicle Sales in the Canada

Based on not seasonally adjusted (NSA) numbers.
Data source: Statistics Canada.
Chart: CMD.

Capacity Utilization Rates (%)
(Leading indicators for industrial construction)

Year Ago Quarter Ago Latest Percentile Changes
A B C C vs B C vs A
Total Industry        
U. S. (1) 78.5% 79.0% 80.1% +1.1 +1.6
  (Nov 13) (Aug 14) (Nov 14)    
Canada 81.0% 82.8% 83.4% +0.6 +2.4
  (Q3 13) (Q2 14) (Q3 14)    
         
Manufacturing      
U. S. (2) 76.4% 77.3% 78.4% +1.1 +2.0
  (Nov 13) (Aug 14) (Nov 14)    
Canada 79.7% 82.8% 83.8% +1.0 +4.1
  (Q3 13) (Q2 14) (Q3 14)    
         
Mining and Oil &Gas Extraction    
U. S. (3) 87.8% 89.9% 87.9% -2.0 +0.1
  (Nov 13) (Aug 14) (Nov 14)    
Canada 85.3% 87.3% 86.6% -0.7 +1.3
  (Q3 13) (Q2 14) (Q3 14)    

(1) 1972 to 2003 (i.e., long-term) average for U. S. total industry = 80.1%.
(2) 1972 to 2003 (i.e., long-term) average for U. S. manufacturing = 78.7%.
(3) 1972 to 2003 (i.e., long-term) average for U. S. mining and oil & gas extraction = 87.3%.

Source and Chart: CMD.



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