05/15/2013 08:42 EDT | Updated 07/15/2013 05:12 EDT

Manufacturing recovery takes a detour, but long-term prospects brighter

OTTAWA - Canada's manufacturing recovery took a small detour in March, disappointing markets and returning some of the encouraging gains that the sector had made the previous month.

Sales in the factory sector fell 0.3 per cent to $49.5 billion following an upwardly revised 2.8 per cent increase in February, as petroleum and coal products unexpectedly fell.

But analysts, who had predicted a 0.6 per cent advance, said the bottom line was not as bad as it looked, noting that volumes — which directly affect gross domestic product — still increased by 0.2 per cent and that the important auto sector posted a positive number on top of a heady gain in February.

As well, Statistics Canada introduced new methodological and timing adjustments in the month's survey, which may have skewered the month-to-month comparison.

"It was a disappointment but it wasn't a terrible report. I'd describe it as mixed," said Jimmy Jean of Desjardins Capital Markets. "Overall, if we spread out (February and March), it's still a pretty solid picture."

David Madani, chief economist with Capital Economics in Toronto, said after incorporating the new manufacturing data, Canada's GDP likely expanded between two and 2.5 per cent in the first quarter of 2013. That would make the first two-plus growth rate in five quarters, and well ahead of the 0.6 per cent increase in the final three months of 2012.

"Looking ahead, we expect to see further improvements ... as the U.S. economy continues to improve and the rise in exports translates into better manufacturing sales," he predicted.

That improvement may not be seen in the immediate next few months, however. The drag from U.S. government spending cuts, known as sequestration, that went into effect in March is expected to hit the American economy in the current second quarter.

The impact may already be showing up in the 2.2 per cent fall-off in new orders signalled in the Canadian report, and in industrial production numbers released south of the border Wednesday morning showing a 0.5 per cent drop in April.

"Given that Canadian manufacturers rely heavily on U.S. demand, the slowdown that the American economy is expected to experience during the second quarter will be a headwind for the sector in the near term," explained TD Bank economist Dina Ignjatovic in a note to clients. But she agreed the picture was brighter longer term.

The March breakdown for Canada showed sales declining in 10 of 21 industries, accounting for about one-third of manufacturing.

Sales of non-durable goods declined 0.8 per cent to $24.4 billion and were partially offset by a 0.2 per cent increase in sales of durable goods.

The biggest hit came from the important petroleum and coal products industry, which fell by 2.6 per cent. Chemical manufacturing declined by two per cent. Clothing sales plunged 17.8 per cent, but they represent a tiny fragment of manufacturing.

On the flip side, sales of plastics and rubber products rose 3.7 per cent, non-metallic minerals by two per cent and motor vehicles by 1.5 per cent.

Sales fell in six provinces in March with most of the decreases reported by manufacturers in New Brunswick and Saskatchewan.

Sales jumped 30.7 per cent in Newfoundland and Labrador and there was very little change in the sales in other provinces.