Factories Slow and Service Firms Shed Staff Heading Into the Fourth Quarter
September's purchasing managers' surveys show manufacturing losing momentum and services contracting for a fourth month. Firms are cutting headcount while still complaining they cannot find skilled people.
Canada's factory sector is still growing, but more slowly than at any point since the spring. The S&P Global Canada Manufacturing PMI fell to 51.5 in September from 53.0 in August, its lowest reading in six months. Economists had expected 52.9. A reading above 50 signals expansion.
The drop follows a strong summer. In July the index reached 53.5, its highest level since June 2022, and in August manufacturers reported their fastest job creation since October 2024. September broke that run.
What slowed the factories
Output kept rising in September, but at a gentler pace, with firms reporting hesitation among clients. New export orders fell for a fourth consecutive month as demand from American customers weakened amid rising trade friction.
Supply chains also worsened. Manufacturers cited customs delays at the U.S. border, the conflict with Iran and demand related to artificial intelligence as sources of strain. Delivery delays were the most widespread since August 2022, and stocks of purchased inputs fell for the first time in six months as firms drew down inventory.
Costs are the sharpest pain point. Product shortages and high energy prices pushed input cost inflation to its highest level since mid-2022.
The household survey lines up with that picture. Manufacturing employment fell by 13,000 in September, according to Statistics Canada, reversing part of the 22,000 gain recorded in August.
Services: still contracting, a little less
The service sector, which employs most Canadians, remains in contraction. The S&P Global Canada Services Business Activity Index rose to 48.3 in September from 46.8 in August, still below the 50 line. Activity and new business fell, though at slower rates, as tariff uncertainty and the war in Iran weighed on clients.
The composite index, which blends both sectors, rose to 48.7 from 47.8. It has now been below 50 for four consecutive months, and employment across the private sector recorded a net decrease.
The staffing paradox
One line in the services survey deserves to be read twice. Service providers cut staff in September in response to weaker activity and new business, and S&P Global reported that the cuts were made worse by difficulty finding suitably skilled workers.
That is the market staffing firms are navigating this fall. Volume demand is soft: clients are trimming, not adding, and the September Labour Force Survey shows the job finding rate for unemployed Canadians at 30.6 percent, well below its pre-pandemic average. Yet specialized roles remain hard to fill. Firms with deep benches in skilled and technical categories are positioned to win work even as general headcount shrinks. Firms built on high-volume, lower-skill placement face a tougher quarter.
Margins under pressure
The pricing data point the same way. Services firms faced sharper increases in operating costs from tariffs and energy, but strong competition limited their ability to pass those costs on. Output price inflation fell to a seven-month low.
When clients are absorbing higher costs they cannot pass through, labour spend is among the first lines they scrutinize. Staffing firms should expect harder conversations about markups, longer approval cycles for new requisitions and more requests to convert temporary assignments into lower-cost arrangements.
One reason for optimism
Sentiment improved. Services firms grew more confident about the year ahead, with optimism reaching its highest level since April, and composite sentiment hit a five-month high. Confidence tends to lead hiring. If the October readings hold that improvement, the first quarter of 2027 could look better than the fourth quarter of 2026.
The next manufacturing PMI is due in early November.