Canada Factory Sales Rise in May for Third Straight Month -- Update

By Paul Vieira Features Dow Jones Newswires

Canadian factory sales rose for a third straight month in May on broad-based gains led by the automotive and chemical sectors.

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The increase in sales, which recorded their best performance in nearly three years on a year-over-year basis, is another sign that the economy is moving at a higher gear and closer to full capacity, prompting the Bank of Canada last week to raise its main interest rate for the first time since 2010.

Factory shipments rose 1.1% in May on a seasonally adjusted basis to a record 54.59 billion Canadian dollars ($42.67 billion) from April, Statistics Canada said Wednesday. That beat market expectations for a 0.8% increase, according to economists at Royal Bank of Canada.

On a volume, or price-adjusted, basis, factory sales also rose 1.1%.

"May's factory data showed that the goods sector is delivering the goods for the Canadian economy these days," said Avery Shenfeld, chief economist at CIBC World Markets.

The previous month's data were reduced, and now show manufacturing shipments climbed 0.4% in April as opposed to the earlier estimate of a 1.1% rise. New sales figures from respondents, especially in the food-processing component, prompted the reduction.

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On a 12-month basis, manufacturing shipments rose 8.7%, or the best one-year performance since July, 2014. That is around the same time commodity prices began a broad-based, swift descent.

The Bank of Canada last week raised its policy rate by a quarter percentage point, to 0.75%, and signaled further rate rises could be in the offing as growth picks up steam and unused labor and production capacity gets absorbed at an accelerated pace. The central bank now expects the output gap, or a measure of slack in the economy, to close by the end of 2017.

The central bank expects exports to make an "increasing contribution" to economic output, and business investment to pick up momentum as firms hit their capacity limits.

Statistics Canada said 16 of the 21 manufacturing components it tracks posted stronger sales in May.

Sales in the transport-equipment sector rose 4.2% to C$11.51 billion, led by motor vehicles, up 8.6%, and auto parts, up 5.7%. Excluding the auto component, Canadian manufacturing shipments fell 0.1%.

Shipments of chemical products rose 2.4% to C$4.42 billion, on stronger demand for pesticides and fertilizers. The data agency said there tends to be a pickup in demand for those products at this time of the year, as farmers finish seeding.

Partly offsetting these gains were a 3.4% drop in sales of petroleum and coal products, to C$5.03 billion, and an 11.8% decline in shipments in the volatile aerospace sector.

Meanwhile, inventories in May fell for the first time in six months, down 0.2% to C$73.68 billion. A decline in inventories suggests consumption exceeded production.

Two forward-looking gauges fell, mostly due to weakness in the aerospace sector. Unfilled orders, or the stock of orders that will contribute to future sales assuming they aren't canceled, decreased 1.5% to C$89.08 billion, while new orders dropped 3.6% to C$53.27 billion.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

July 19, 2017 09:24 ET (13:24 GMT)