It says declines in production of transportation equipment, including aerospace products and motor vehicles, were largely responsible for the overall drop.
Economists had been expecting a slight gain.
"Adding salt to the wounds, June was revised down by four ticks to a drop of 0.8 per cent," CIBC World Markets economist Emanuella Enenajor said in a note to clients.
"A look at the details is even more discouraging. While petroleum and coal products (responsible for much of the weakness in recent months) was flat, other important categories such as primary metals, machinery and autos were down."
Enenajor said the numbers suggest Canadian economic growth in the third quarter could fall short of the bank's forecast of 2.3 per cent, and may even miss the Bank of Canada's call of two per cent "unless the lost ground is made up in the next month."
Manufacturers in 11 of 21 industries reported lower sales, representing over 60 per cent of total manufacturing.
Sales of durable goods fell 2.7 per cent, while sales of non-durable goods edged down 0.1 per cent.
Sales declined in five provinces in July, with Ontario and Quebec reporting the largest decreases in dollar terms.
In Ontario, sales were down 1.9 per cent to $22.3 billion, while Quebec sales were off 2.6 per cent to $11.3 billion.
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