Statistics Canada is reporting that Canadian manufacturing shipments edged 0.1% higher in October. This was the fourth consecutive month of gains and it came in line with expectations.

BMO Nesbitt Burns says that new orders also managed to make some headway in the month, beating expectations with a 0.8% rise. “The small gains in activity contrast sharply with the steep decline in U.S. industrial production in the same month,” BMO says.

RBC Financial Group economists note that shipments increased in 11 out of 21 manufacturing industries and seven out of 10 provinces. “Although the pace of increases in shipments slowed, it adds to other recent evidence of strength in manufacturing including the addition of 33,000 new jobs in November that reversed the job losses over the previous two months,” says RBC. “Manufacturers are now operating at about 85% of their capacity which bodes well for the outlook for business investment to expand capacity. Furthermore, manufacturers added to their inventory positions (+0.5% over October), which provides further strength to the business investment picture. Since inventories are the single best driver of overall business borrowing activity, this also bodes well for the outlook for lenders.”

But, while the headline results were encouraging, Nesbitt sees a few trouble spots beneath the surface. “Both shipments and orders were revised down in September (from 1.2% to 0.4% for shipments, and from -1.2% to -2.2% for orders). The backlog of unfilled orders fell 0.5%, the third decline in the past four months, and down 3.2% year over year. The small rise in shipments was entirely due to a price-related increase in petroleum & coal products; outside of this sector, shipments fell 0.1%. These minor concerns are compounded by the fact that auto production is poised to slip in the months ahead amid the steep rise in North American auto inventories.”

TD Bank agrees that there are reasons to be cautious, “While today’s figures show that Canada’s factor sector remains airborne, there is little doubt that it is losing altitude as 2002 draws to a close. Not only did October’s rise in shipments of 0.1% barely register on the radar screen, but the forward-looking ingredients of this morning’s Survey — notably the level of unfilled orders — clearly suggest Canada’s manufacturing sector will be hard-pressed to record expansion in the months ahead.”

“There is good reason to believe that the pace of expansion in Canadian manufacturing will continue to lose steam in the months ahead, a message that rang loud and clear in Statcan’s Quarterly Business Conditions Survey of Canadian manufacturers for the fourth quarter, which was released last month,” says TD. “Until the U.S. economy begins to strengthen measurably — which we don’t expect until the middle part of 2003 — look for a sub-par growth performance in Canadian manufacturing.”

“Canadian manufacturing remains considerably healthier than in the U.S., but there are clear warning signs of slower near-term activity,” concludes BMO.