Industrial capacity utilization recorded its biggest jump in almost a decade in the fourth quarter with the recovery of exports and a red-hot residential construction market, Statistics Canada reported today.

Manufacturers used 82.9% of their capacity to make products in the quarter compared with 81.3% in third quarter of the year, the agency said.

“This was the largest quarterly gain since the second quarter of 1994, when the rate also increased by 1.6 percentage points, reaching 82.4%. “

“Still, the rate for the fourth quarter of 2003 remained much lower than the most recent high of 85.4% reached in the fourth quarter of 1999.”

However, despite the strong fourth-quarter gain, the average annual rate for 2003 was 82%, down from 82.3% in 2002 and the lowest since 1996, when it hit 81.2%.

The agency attributed that result to disruptions in the economy in 2003 caused by SARS, mad cow scares and the mid-August blackout in Ontario.

“On the bright side, the January 2004 business conditions survey reported that manufacturers appeared more optimistic and expected to increase production in the first quarter of 2004,” StatsCan said.

Responding to the report, BMO Nesbitt Burns says “The big recovery in capacity utilization is partly a reflection of the rebound in GDP and industrial production in Q4, and the lack of new capital spending in recent years. However, it also casts at least a shadow of doubt over how much slack remains in the economy.”

Nesbitt notes capacity utilization in the fourth quarter was “up from a year ago, despite the fact that GDP rose by less than 2% last year.”

“Thus, we are left with the curious (or bizarre) fact that both of Canada’s major measures of economic slack — CAPU and the unemployment rate — have actually tightened slightly over the past year despite a stumbling domestic economy. While most simply accept the fact that potential GDP growth in Canada is 3%, these reports raise serious doubts on this conventional wisdom, and also raise doubts over how much slack truly remains in the Canadian economy,” Nesbitt says.

RBC Financial cautions that there is the possibility that production activity, and therefore utilization, may slow if U.S. demand becomes softer due to continued currency pressures. “Yesterday’s weaker trade figures for January certainly point to this risk. However, stronger domestic demand, on the back of healthy employment growth and rising corporate profits, is expected to provide an offset,” it says.