“This morning’s figures on manufacturing activity for May did not paint a pretty picture of trends in Canada’s all-important factory sector during the second quarter,” said TD Bank. It says that shipments are on track to record a whopping 14% drop at annual rates for the second quarter as a whole. “Worse, accompanying figures on unfilled orders provide little hope that the factory sector is poised to bounce back. In short, today’s report will reinforce recent fears that Canada’s manufacturing sector is hurting badly.”

BMO Nesbitt Burns says that much of the decline reflects lower industrial prices, “a translation effect of the spike in the Canadian dollar in the month.” It notes that a total of 13 of 21 industries reported setbacks in the month, and ex-auto shipments were down 1%. RBC Financial also points out that mad cow reared its ugly head in Alberta’s manufacturing sector in May as lower shipments of food, primarily due to the export ban on beef contributed to an overall decline in activity in this province.

Also, manufacturing inventories fell 0.5%, and the inventory to shipments ratio remained stable at 1.49 in May. “The outlook for manufacturing remains bleak,” says RBC. “While yesterday’s surprising interest rate cut by the Bank of Canada set the Canadian dollar on a tail spin, policy spreads still remain generously in Canada’s favour and will continue to support the dollar. Clearly, manufacturers will have to continue to face the challenges of living with a higher dollar and indeed so will other Canadian industries.”

“The weakness in the May factory report was accentuated by declines in industrial prices, but the underlying trend in manufacturing is clearly suffering from the prior loonie surge, sluggish U.S. auto sales, and generally soft global demand,” says Nesbitt.

RBC says that an improving U.S. economy is necessary to revive Canadian manufacturing. “A number of signs have recently suggested that such a recovery is finally beginning to take hold, and with this glimmer of hope on the horizon, manufacturers and Canada’s economy as a whole should expect to face better prospects over the second half of this year,” it notes.

TD is a little more cautious, saying, “The worst may be over for the U.S. economy, but the lukewarm rebound in demand emerging from south of the border will provide only a trickle of solace to a Canadian manufacturing industry which is still reeling from the impact of a 13-per-cent appreciation in the Canadian dollar so far this year. Keep in mind that is not only the export-oriented industries that the currency appreciation will adversely affect, but any sector that supplies to the domestic market in competition with U.S. imports.”