Manufacturing sales roar back, but outlook for future months remains weak

OTTAWA – Canada's battered factory sector rebounded strongly in August, a welcome and surprising development that could help rescue the third quarter numbers for the economy.

Statistics Canada reported manufacturing sales rose 1.5 per cent to $49.5 billion during the month to the highest level since March 2012.

Adding sugar to the report, the agency also revised July's 1.5 per cent decline to 0.8 per cent, putting an upside risk to projections that the July-September three month period will be the weakest since the spring of 2011.

“The strong result sends a good signal for August's GDP (gross domestic product) estimate,” said Jimmy Jean of Desjardins Capital Markets.

“GDP will still be below potential in (the third quarter), however, and (Bank of Canada governor) Mark Carney's speech of yesterday laid the ground for some downside forecast revisions” next week when the bank issues a new forecast.

Other analysts speculated the third quarter could actually come close to meeting the central bank's two per cent call, something few thought possible a few weeks ago.

The August result suggests the economy is still growing, and a similar strong report out of the United States – showing industrial production advanced 0.4 per cent in September – also added to the momentum.

Still, analysts cautioned about too much optimism, noting that some of the gains in Canada were likely temporary and that the factory sector in the U.S. remains weak.

“Looking out to the rest of 2012, manufacturing should experience little positive momentum,” said Sonya Gulati, a senior economist with TD Bank. “Domestic manufacturers are encountering headwinds from relatively firm commodity prices and a Canadian dollar hovering near or above parity.”

The stiffest breeze remains what Carney on Monday called “uncertainty” about policy-makers' ability in Europe, the U.S. and China to resolve their economies' difficulties.

The governor is widely expected to pare down his expectations for the economy in next week's updated review of Canadian and global conditions, as well as to move off his interest rate tightening bias to a more neutral position. That would confirm in market players' minds that the Canadian bank has no intention of raising interest rates any time soon.

In a speech Monday, the governor jettisoned language about the need for “some modest withdrawal of the present considerable monetary policy stimulus” as conditions improve.

The manufacturing performance in August was strong across the board with 11 of 21 industries representing three quarters of the total manufacturing base reporting gains.

In nominal terms, sales were up 1.8 per cent, indicating a gain in the volume of manufactured goods sold.

Sales in the petroleum and coal product industry rose 8.6 per cent to $6.8 billion, partly because some refineries emerged from slowdowns for maintenance and retooling.

The motor vehicle assembly industry roared back to life with 4.4 per cent bump to $4.7 billion as some plants reported higher-than-usual seasonal increases following scheduled shutdowns in July.

Regionally, Ontario led the way with a 2.5 per cent increase, while Quebec and Manitoba reported sales declines.