The latest data on Canadian manufacturing shipments came in surprisingly strong for March. Economists expected a decline in shipments, but they were met with a 1.4% rise instead.

“If the mighty loonie and stumbling U.S. growth are going to bring Canadian industry to its knees, somebody had better let manufacturers know about it,” comments BMO Nesbitt Burns. “Even in the face of gloomy U.S. results, Canadian manufacturing shipments and orders made a mockery of expectations for a decline in March, with solid gains in both measures.”

Nesbitt cautions that much of the 1.4% rise in shipments in the month was due to an unsustainable boost in auto production and high oil prices, but, even excluding these items, shipments were up 0.3%. And 13 of 21 industries reported gains in the month. “Given the backdrop of a stumbling U.S. economy in March and a raging loonie, any increase in shipments must be regarded as a remarkable feat,” Nesbitt says.

TD Bank says that the gain more than offset a 1.1% decline in February. As a result, shipments in the first quarter rose by 2.2%, rebounding from a 0.9% decline in the fourth quarter. “While this is a healthy performance, the road ahead will be more difficult, as most indicators point to weaker manufacturing activity in the second quarter,” it forecasts.

Nesbitt also notes that new orders have been even more impressive than shipments, posting solid increases for three consecutive months. “This has not been sufficient to halt the slide in unfilled orders, which fell 0.4% in March and are now at their lowest level in over four years. However, this steep decline is largely concentrated in the battered aerospace industry, which alone accounts for about a third of unfilled orders. Inventories are gradually building, but the inventory/shipments ratio remains relatively low,” it says.

“Despite the good news in March, there are unambiguous dark clouds on the horizon for Canadian manufacturers,” TD insists. “First, energy prices have already tumbled from the highs recorded before the Iraq war and are likely to head even lower in the coming months, reducing the value of petroleum shipments. Second, even with increased incentives, auto sales are likely to shift into a lower gear in the months ahead. Third, the recent rapid appreciation in the Canadian dollar will squeeze the international competitiveness of Canadian exports and pinch exporters’ profit growth. Fourth, economic conditions in the United States are likely to have remained weak in the second quarter, and U.S. economic growth is unlikely to rebound to well above potential until the fourth quarter of this year, implying poor demand for Canadian exports in the near term.”

TD concludes. “All in all, conditions in Canadian manufacturing are likely to improve before year-end, but there will be some rough seas for firms to navigate in the coming months.”

“There is no doubt that the muscular loonie and the impending auto production cuts are going to hit manufacturing in the months ahead,” Nesbitt allows, “but it is very impressive how solid Canadian factory activity was in Q1, particularly in light of how soft U.S. activity was in that period.”