The Monthly Survey of Manufacturing for May showed manufacturing shipments fell 1.4% to $43.4 billion during the month, following a 5.2% surge in April. Although this was a notable drop, it only partly offsets the upwardly revised gain in April, and shouldn’t derail the Bank of Canada’s plans to increase interest rates.

Bank of Montreal says that “the underlying trend in manufacturing output remains decidedly up. This sector is benefiting from broad-based strength in the economy responding to low interest rates, a weak currency and earlier-introduced stimulative fiscal measures.”

BMO notes that the drop in the month was almost solely due to a 6.3% drop in production by motor vehicle and parts manufacturers. Excluding this sector, shipments were only down by 0.1%, “implying almost no retracement from the strong 3.4% rise in April.”

Only 10 of 21 industries decreased in May, and inventories remained unchanged, standing at $62 billion, following a 0.3% rise in April. Also, unfilled orders rose for the fourth consecutive month, and inventories remained flat.

“The report is consistent with our view that overall economic growth will remain strong in the second quarter rising 5.25% though this will be down from the 6% rise recorded in the first quarter,” says BMO Nesbitt Burns.

RBC Financial Group says that this report simply suggests “that manufacturers took a break in May following exceptional production levels in April”. It notes that manufacturing shipments are running 7.4% above December 2001 levels, new orders remain 10% above December 2001 levels, and the inventory-to-sales ratio remains close to its 18-month low. “Add to that the fact that manufacturing employment has risen 113,000 since the beginning of this year and has returned to its peak level reached in December 2000 and you have a picture of a sector firing on all cylinders. Nothing in this report alters our view that the Bank of Canada will keep moving rates up aggressively relative to the Fed during the balance of this year,” it concludes.

BMO Nesbitt Burns says, “Despite the headline decline, this report gives further weight to the view that the long-term trend in the Canadian economy is continuing to improve. The impact on future Bank of Canada rate moves will depend crucially on whether the recent stock market turmoil weighs significantly on consumer confidence and spending activity.”