Canadian economists have developed quite different interpretations for the first quarter Business Conditions Survey published this morning by Statistics Canada.

StataCan said producers indicated some lower satisfaction with the levels of new and unfilled orders for the first quarter of 2003.

RBC Financial economists say that the report was generally upbeat. “The assessment of production trends over the next three months rose 6 points to +6 from a neutral 0 reading in Q4 and is way up from the -23 reading in Q4 2001. The Business Conditions Survey has a good track record and correlates strongly with actual manufacturing activity, and this report does nothing to alter the expectation that interest rates will soon be on the rise.”

However, it notes that new orders readings fell from +9 to +3, and the backlog of unfilled orders fell to -12 from -10. “Although StatsCan reported that businesses seem a bit cautious despite the climb in expected output, the drop in new orders came about because of a drop in the number of firms reporting that new orders are rising and a rise in the number that report orders are ‘about the same’ and not an increase in firms reporting fewer orders, so it’s important not to read too much negativity into this release.”

RBC is also pleased to see that there was no change in any of the responses related to employment levels over the next three months, with 72% saying employment was just right and 13% planning an increase. “Economists worry about an impending drop in employment after 133,000 new jobs were created in Q4, but nothing in this report suggests one is looming. In an interesting contrast to news constantly flooding in from south of the border, firms once again reported skilled labour shortages as their largest obstacle.”

However, BMO Nesbitt Burns puts a slightly gloomier spin on the numbers. “Canadian manufacturers expect a small increase in production over the next three months, but are lukewarm on the overall outlook since they still view the backlog of orders as soft and the inventory level as too high,” it says.

BMO Nesbitt’s own Business Conditions Index slipped slightly in Q1 to 49.6 from a downwardly revised 49.8 in Q4 (initially reported at 50.0). The index is derived from a survey of 4,000 manufacturers by StatsCan, and is based on the ISM index, where a reading over 50 is consistent with growth and under 50 points to some softening in factory activity, it says. “The survey was conducted in the first two weeks of January, and was likely clouded by the Iraq uncertainty.”

“The production measure was the lone bright spot in the latest survey, rising to the 53 level. Orders also managed to stay above the key 50 level, although they softened somewhat from the prior quarter. Employment remained at 49 for the fourth quarter in a row. Recent factory payroll results have clearly weakened after surprising strength in the first three quarters of 2002,” it says.

“This soggy result contrasts significantly with the surprisingly robust U.S. ISM reports for the past two months. Canadian industry appears to be in a holding pattern, awaiting a stronger recovery in U.S. and overseas demand. Softer auto sales are also weighing on Canada,” concludes BMO.

The only data out in the U.S today is December factory orders, which rose 0.4%, above expectations. “The outlook for the factory sector will stay choppy until a resolution of the Iraq issue clears the war-related uncertainty from the outlook,” reports RBC.

Also, the U.S. weekly retail chain store sales report from the Bank of Tokyo-Mitsubishi showed that sales fell 0.9% for the week ended February 1, reversing most of the gains of the previous three weeks. In year-over-year terms sales were up 2.7%, down a bit from the 3.1% pace in the two weeks following Christmas. “The U.S. retail sector is holding up, but is not proving to be a source of robust growth in early 2003,” RBC concludes.