Canadian economic outlook gets major boost from U.S.

OTTAWA — Canada’s economy is getting an indirect boost from south of the border with news that America’s factory sector is rebounding strongly and ready to pull Canada’s manufacturers along for the ride.

OTTAWA — Canada’s economy is getting an indirect boost from south of the border with news that America’s factory sector is rebounding strongly and ready to pull Canada’s manufacturers along for the ride.

In an unexpectedly upbeat report, the U.S. Institute for Supply Management said its manufacturing index rose to its highest level in almost three years in December, while new orders hit a five-year peak.

Both exceeded expectations by wide margins.

Given the significant integration between American and Canadian manufacturers — particularly in autos — the U.S. performance is likely to have a direct impact on factory floors in Canada.

“It’s huge,” said Derek Holt, vice-president of economics with Scotia Capital. “If the U.S. manufacturing sector really is stabilizing and recovering, then given the seamless cross-border integration of manufacturing production, it’s going to be a boon to Canada as well.”

Canada’s recovery from the deep recession so far has been almost entirely due to strength in the domestic economy, particularly the rebound in housing and consumer sales.

But a significant gain in the factory sector, which the Canadian Manufacturers and Exporters Association estimates shed 200,000 last year, would go a long way to support job growth and broaden the recovery, particularly in Ontario.

“It’s gratifying to see the recovery is continuing (and), if anything, it seems to be gaining momentum,” said economist Douglas Porter of BMO Capital Markets.

“This points to fairly strong growth at the start of 2010.”

In another encouraging signal to the start of the year, the Royal Bank’s newest consumer confidence survey shows a strong majority of Canadians believe the economy will improve this year and fewer planned to delay major purchases.

Overall, the bank’s index was up eight percentage points in December from November, although one in five said they were still worried that a member of their household could lose their job.

The lone sore point Monday was data that showed construction activity in the U.S. falling in November for the seventh straight month, a further indication that housing remains the weak link in the U.S. recovery.

The manufacturing report is particularly significant, however, given that it was the sector most hit by the slowdown in Canada.

TD Bank economist Millan Mulraine said the ISM has a consistent track record in detecting economic activity in the United States.

The index rose to 55.9 per cent, the third straight month it has been above 50, the dividing point between contraction and growth. It was also the only time in nearly three years the index was convincingly above 50, besting November’s 52 reading.

But while the gain was consistent with an expanding economy, analysts noted that the index is still below the level that would be expected in a robust rebound from recession. A reading of 60 would by more typical in a bounce-back quarter, they said.

Mulraine also noted that the growth was not widespread, with only nine of the 18 industries surveyed reporting expanded activity.

Overall, however, economists called the index level a solid foundation for growth in the New Year.

“The trillion-dollar question is: Is it believable?” Holt said.

The Scotiabank economist said his enthusiasm is tempered somewhat because the ISM survey finding of factory jobs increasing and inventories decreasing hasn’t been confirmed by other data.

The slightly off-focus picture, which may be caused more by timing factors than reliability, will become clearer this week with Tuesday’s factory inventories report in the U.S. and Friday’s jobs data in both Canada and the U.S.

Some U.S. economists are holding out hope that the employment data will show the first jobs growth in 23 months occurred in December. The consensus in Canada is for a gain of 20,000 jobs, adding to the 79,000 increase reported for November.