Manufacturing not so weak, as factory production continues to gain strength

Canada’s factories were humming in November, a strong signal for the economy, and suggesting the battered manufacturing sector may have more life than previously thought.

Statistics Canada said that manufacturing sales rose an above-consensus two percent to $49.6 billion during the month – the fourth increase in five months – as output in machinery, petroleum and coal products, and motor vehicle industries posted strong gains.

In real terms, manufacturing sales were up 1.7 percent.

Analysts had expected factory activity to taper off in the final months of 2011 due to the slowdown in the global economy and because of the unsustainable 14 percent pop in the third quarter, which was mostly make-up for supply chain disruptions in the spring.

But on an annualized basis, October and November combined show an additional seven percent gain in terms of volumes, which bodes well for growth in the fourth quarter.

The Bank of Canada recently upgraded its growth prediction for the final three months to two percent from 0.8; but even that revision may not be adequate to cover the contribution of the key factory sector.

“I, like the Bank of Canada and a number of others, have bought into the argument that we’ve lost trade competitiveness with the strength of the Canadian dollar and weak productivity, but at some point you’ve got to let the facts speak for themselves,” said Scotiabank economist Derek Holt. “The kind of gains we’re seeing in manufacturing should challenge that belief.”

David Madani of Capital Economics said it is still unclear how long this surprising strength can continue, and he noted that November’s output was partly based on unusual temporary factors.

The machinery industry reached its highest sales level ever in the month, as sales rose 13 percent to $3.4 billion as a “number of companies completed large projects” in the mining, oil and gas field machinery industry, Statistics Canada noted.

Still, sales were up in 14 of 21 industries, representing approximately 80 percent of Canadian manufacturing, the agency said.

Motor vehicle sales rose 7.1 percent to $4.1 billion in November, and have increased 25 percent since their low point last June.

Holt said there is reason to believe the factory momentum could hold at least well into the first quarter of this year.

New orders climbed 3.6 percent from the previous month, and are up 20 percent from a year ago.

“That suggests it’s sustainable for a least a few months,” he said. Whether it lasts beyond the first quarter is much more uncertain, he added.

Overall gains in November were somewhat offset by declines in the computer and electronic product industry, where sales were down 11 percent to $1.2 billion. Inventory levels rose 0.4 percent.

Manufacturing sales rose in nine provinces in November, with Ontario, Alberta and Newfoundland and Labrador posting the largest provincial increases in dollar terms.