07/16/2013 08:39 EDT | Updated 09/15/2013 05:12 EDT

Economy gets boost as battered factories show signs of life in May

OTTAWA - Canada's factories went back to work with a near-consensus 0.7 per cent pick-up in sales to $48.6 billion in May, boosting hopes for a better-than-expected second quarter for the economy.

The bounce-back comes after an April that saw manufacturing sales fall 2.1 per cent, but even that number was upgraded from the previously reported 2.4 per cent drop.

"The 0.7 per cent month-to-month rise in manufacturing sales volumes suggests that GDP (gross domestic product) growth in May might have been higher than 0.1 per cent. As a result, the risks to our forecast that second-quarter GDP will rise by 1.5 per cent annualized now lie to the upside," said David Madani of Capital Economics.

Shipment volumes also rose 0.7 per cent as 11 of 21 industries registered gains.

As well, future indicators also pointed upwards with new orders rising by 1.8 per cent after three consecutive declines and inventories dipping slightly after four months of build-up.

Regionally in May, manufacturing sales were up 1.9 per cent in Ontario, 2.1 per cent in Alberta and 1.6 per cent in British Columbia. Sales were sharply down 2.8 per cent in Quebec.

Economist Jimmy Jean of Desjardins Capital Markets said the report was "better than expected," but also a bit of a mystery, noting that some of the data contradicted previously reported trade figures for the month and a drop in factory hours worked in May.

The rebound also did little to reverse what has been an anemic year for manufacturing, a key sector for the overall health of the economy, particularly with home construction flattening and the natural resources sector facing less-than-robust global demand.

Manufacturing sales remain 3.7 per cent down from December 2011 and 8.7 per cent below their pre-recession peak, points out TD Bank's Francis Fong.

"The prevailing theme for the manufacturing sector continues to be waiting on the U.S. economic recovery to regain momentum," he said. "As demand south of the border picks up, this should translate into a stronger performance for Canadian manufacturers."

That may be at least several months into the future however, as the U.S. economy still appears to be struggling to recuperate from government cutbacks mandated under the sequestering stand-off in Congress.

The U.S. reported Tuesday that its industrial production rose a mere 0.3 per cent in June, bringing the quarterly increase to 0.6 per cent annualized. That represents a marked drop-off from the first quarter's strong 4.2 per cent advance.

Fong said he is expecting stronger numbers from the U.S. in the second half of this year and in 2014, and that should boost Canadian activity as well.