Sector outlook: Manufacturing

Sectors in-the-know investors will definitely want to keep an eye on

If there's one sector hoping for a rebound in 2007, it's manufacturing. After all, 2006 was downright awful, with a strong loonie, weak U.S. consumer spending and intense foreign competition all cutting into sales at home and abroad. Particularly hurting are those making auto, rubber, plastics, textile/clothing, wood, paper, furniture and electrical equipment products. The upcoming year has to be better, right? Probably not. Canadian manufacturers are pessimistic about their prospects: One-fifth of them expected to cut staffing during the fourth quarter, according to the most recent Business Conditions Survey by Statistics Canada, and only 10% thought new orders would increase.

Yet the bad news doesn't spread to all subsectors. Those manufacturers who relied more on the domestic market likely fared better than those who heavily exported to the United States, Canada's major customer, says Derek Burleton, senior economist at TD Bank Financial Group. Business equipment suppliers also thrived. “Corporate balance sheets in both Canada and the U.S. are in very good shape, and we anticipate further business investment and spending over the next year or two,” says Burleton.

Yes, the auto industry likely won't rebound until 2008 when Toyota starts production at its new plant in Woodstock, Ont., and U.S. spending recovers. But those in electronics, machinery, chemicals, refined petroleum and coal products–and especially aerospace–should see improvements in 2007, according to Marie-Christine Bernard, associate director at the Conference Board of Canada. “It won't be spectacular growth,” she says, “but maybe the bleeding won't continue.”

The aerospace industry is skyrocketing after several grounded years because of rising demand from China and India. The Conference Board predicts aerospace profits will top $1 billion next year, quite an improvement on the $398 million generated in 2005. Meanwhile, makers of electronics equipment such as wireless should see output grow by 6.7% over the next two years, according to BMO Financial Group research, and production of business machinery is expected to grow by 6% during 2006-07. “Overall, there are all sorts of opportunities out there for specialized producers,” says Douglas Porter, deputy chief economist at BMO Capital Markets. Offshore opportunities include power generation equipment for emerging markets, and environmental products, says Porter. At-home demand will be created by large projects such as investments into the oilsands and commercial construction.

Conditions, then, may not be as bleak as they seem. But manufacturers, especially those in labour-intensive sectors, are still in for a rough ride as they adjust to the realities of the new world order–at least until 2008.