The strong Canadian dollar has hurt manufacturing shipments, which decreased 1.1% to $42.5 billion in October, according to Statistics Canada.

“Manufacturers managed to reduce inventories (-0.6%) for the sixth consecutive month, but failed to fill their books with new orders (-3.2%),” says StatsCan. October’s decrease in shipments was broadly based, spanning 15 of 21 industries, accounting for 71% of total shipments.

The weak result has economists expecting more rate cuts.

BMO Nesbitt Burns says that the weak reading was not very surprising result after last Friday’s report of a 4.2% drop in merchandise exports in the month. “In fact, the drop was milder than we expected, and effectively leaves shipments in line with levels prevailing around mid-year,” Nesbitt says. “The slide was largely due to a pullback in auto assemblies and computer equipment as well as lower industrial prices — largely a function of the strong loonie.”

“This morning’s manufacturing shipments report for October dealt a handful of weak data,” says TD Bank. It allows the headline drop was no surprise, but notes “Perhaps more startling was the dismal results posted by the more forward-looking indicators in the report. Unfilled orders — a key gauge of future shipments — contracted by 2% in October, reaffirming that the modest uptick in September was nothing more than a distortion-related rebound following the Ontario power outage. Unfilled orders have declined in 13 of the past 14 months and now stand an eye-popping 19% below year-ago levels. Manufactures were also unable to rustle up any new orders in October, which contracted by 3.2 %.”

“There is no denying that the manufacturing sector is suffering on a broader basis, burdened by a sudden drop in competitiveness from the rapid appreciation in the Canadian dollar,” TD says. “So much so, that a surging U.S. economy has yet been unable to offer a greater offset, which leaves us to believe that the Canadian economy is on a softer growth trajectory than the Bank of Canada had estimated in its October Monetary Policy Report. This suggests that the output gap will not close by early 2005, as the Bank has predicted, which increases the likelihood that the Bank will cut rates by 50 basis points in the first quarter of 2004.”

Nesbitt insists that today’s results could have been worse. “Manufacturing is among the most vulnerable sectors to the strength in the Canadian dollar, but also stands to benefit heavily from the rebound in U.S. growth,” it says.