The latest quarterly survey of business conditions for manufacturers from Statistics Canada betrays the possible downside risk facing the economy says BMO Nesbitt Burns.

BMO Nesbitt Burns observes that the survey showed no improvement in third quarter expectations, as firms noted a renewed drop in orders and still see inventories as “too high”.

“Converted to a NAPM-style measure, the index fell to 38.8 in Q3 from 40.2 in Q2. While there is no formal consensus on this number, the result is weaker than anticipated — anything below 50 says activity is declining, and Q3 was only slightly above the cycle low of 38.7 reached in Q1, which is flirting with recession terrain.”

BMO Nesbitt Burns says that in the past 15 years, there have been only four quarters below 38, and all of them were during the 1990/1991 downturn. “The Q3 pullback broadly mirrors the U.S. NAPM, which fell again in July after reviving from Q1 lows,” it says.

“The production component of the Canadian index managed to improve for the second straight quarter in Q3, rising to 45.0 from 43.5. Employment also edged up to 46.5, although it remains a bit below the key 50 level, suggesting factory employment will remain soft. However, new orders fell heavily to its lowest level in a decade. As well, inventories deteriorated sharply, as the majority of firms complained that stock levels were still too high.”

“Canadian manufacturers are not seeing any signs of improvement in the outlook, no doubt undercut by the deepening slide in U.S. industrial activity. Despite the Bank of Canada’s happy talk yesterday on the economic outlook, this report highlights the downside risks still facing the economy over the second half of the year,” BMO Nesbitt Burns concludes.