Statistics Canada said Thursday that manufacturing sales hit $46.7 billion in July, with more than three-quarters of the sales gains in Ontario, the heart of the country's auto and steel industries.
Oil products and steel, aluminum and other primary metal manufacturing were among the biggest contributors to the solid gain, which was nearly twice what economists had expected for July.
TD Bank said the solid growth in the summer month diminishes the risk of a recession in Canada.
The Canadian manufacturing sector had posted a weak second quarter as weak U.S. demand — and supply chain disruptions — squeezed the auto and other hard goods sectors.
"After three consecutive months of declines and the headwinds that have plagued the manufacturing sector, today's strong 2.7 per cent gain is a breath of fresh air," TD said in a report.
Scotiabank, meanwhile, noted that inventories remain close to two-year highs but companies are starting to whittle them down, which could impact future production growth in the sector.
"Companies are meeting demand for sales partly flat-lining and perhaps now selling down inventories and that’s key for growth implications, said bank economists Derek Holt and Karen Cordes Woods.
If companies stop stockpiling their production, Holt and Wood said "imventory disinvestment is shaping up to provide a downside to Q3 GDP growth . . ."
Elsewhere in the Statistics Canada report, the federal agency noted that constant-dollar manufacturing sales were up 2.8 per cent.
Higher sales were reported in 15 of 21 industries, representing 74.8 per cent of total manufacturing.
The petroleum and coal products, primary metal and fabricated metal product industries led the gains.
Production fell 17.5 per cent to $946 million in the aerospace product and parts industry, offsetting a portion of the gains in manufacturing sales.
Manufacturing sales were up in seven provinces in July, with Ontario, Alberta and Quebec reporting the largest provincial sales increases in dollar terms.
Nationally, inventory levels edged down 0.1 per cent, the first decline since September 2010. Lower inventory levels were reported by manufacturers in 13 of 21 industries.
New orders increased 1.3 per cent in July to $48.1 billion, led by gains in the primary metal, machinery, fabricated metal product, and petroleum and coal product industries. The increase was mostly offset by a decline in the aerospace product and parts industry.
In another development, a new survey showed Canadians' confidence in the economy continued its drop as the economic climate continues to worsen in both Europe and the United States.
The TNS Canadian Consumer Confidence Index dropped more than another point in September — to 96.4 from 97.6 — after dropping two points in August.
"It is often said that Canada is not an island, and we are certainly seeing the effects of global economic developments on how Canadians feel about their own prospects." said Norman Baillie-David, vice-president of TNS Canada.
"Confidence is continuing to drop even though the Canadian economy continues to perform rather well. We are reacting to the world situation rather than our own. The fear is that falling confidence will halt spending and that tends to be a self-fulfilling prophecy."