Strong factory, consumer data help to ease recession fears

Canada’s factories were humming in August, and U.S. consumers were buying last month, strong indicators the North American recovery is alive and kicking.

OTTAWA — Canada’s factories were humming in August, and U.S. consumers were buying last month, strong indicators the North American recovery is alive and kicking.

Fresh data released Friday shows Canada’s manufacturers posted a surprisingly robust 1.4 per cent jump in sales to $47.6 billion, almost three times expectations, while in the U.S., consumers bought enough autos, clothing and furniture in September to boost retail sales by 1.1 per cent.

The new numbers ended a week and a half of mostly positive news, including jobs, export and housing numbers in Canada and rebounding equity markets globally.

Last Friday’s reports of employment growth in the U.S. and Canada added to the brightening sentiment in equity markets that had seen little to cheer about since late July.

The Bank of Montreal said the indicators have been strong enough to revise third-quarter gross domestic product expectations for the U.S. to 2.3 per cent from 1.9, while Canada is likely to come in at two per cent. Capital Economics is more optimistic, saying Canada’s economy could show an expansion as strong as 2.5 per cent in the July-September period.

That should put to bed any notion that the Canadian economy suffered a so-called technical recession of two negative growth quarters, following the second-quarter’s 0.4 per cent contraction, analysts said.

“It actually looks like the economy did rebound with some authority in the third quarter,” said BMO’s deputy chief economist Douglas Porter.

“I’m (also) quite impressed by how well the basic employment and spending numbers have held up in the U.S.,” he added. “That’s not to say the risks of a recession have vaporized, but it shows this recovery is more resilient than people give it credit for.”

Economists are particularly fixated on the U.S. data for any sign of trouble because of the American economy’s role as an engine of global growth.

David Madani of Capital Economics says the data to date shows that talk of an early recession is premature, but risks persist.

“The more and more data we get, it does confirm that the temporary factors that hurt GDP in the second quarter are being reversed in the third quarter,” he said, referring to supply disruptions caused by the Japanese earthquake in March.

“But I do think the underlying momentum in the economy is slowing,” he added.

Porter said the big wild card remains Europe. While European leaders have talked of an agreement to contain the sovereign debt crisis from spreading, they have not revealed details of what they intend to do.

Analysts believe that how markets assess Europe’s response, once it is known, will be critical in whether the risk of another recession materializes or whether Canada and the U.S. can expect continued, if measured, progress.

On Thursday, Finance Minister Jim Flaherty said a disorderly default by Greece has the potential to spiral into a global financial crisis similar to the Lehman Brothers collapse in the fall of 2008.

Fears of a European meltdown have shaken equity and financial markets, as well as consumer confidence, but as yet not been reflected in the real economic numbers to any large degree.

Madani said he is somewhat encouraged that, as of August, new orders and unfilled orders were still growing.

Economists also threw up caution flags about the strength of the recovery.

“This month’s (manufacturing) results extend a positive sales trend but keep in mind that the recent two-month growth sequence merely makes up for ground lost in the second quarter of the year,” said TD Bank economist Jacques Marcil.

Going forward, Canada’s manufacturers must still cope with a strong dollar and a weak American market, he added. About one third of this country’s factory sales go to the U.S.

Details of the Statistics Canada report show 11 of 21 industries reporting positive sales growth, with a 48 per cent surge in the aerospace sector leading the way.

Transportation equipment sales were up seven per cent, the food industry 3.9 per cent and petroleum and coal products 2.7 per cent. Offsetting the gains, fabricated metal products were down seven per cent and primary metals 2.7 per cent.