Canadian factory sales fall sharply in August

OTTAWA (Reuters) - Declines in Canadian aerospace and auto output triggered a sharper-than-expected drop in factory sales in August from July, exposing manufacturing as the weak link as the economy tries to pull out of recession.

Statistics Canada said on Thursday that factory shipments fell 2.1 percent in the month to C$40.9 billion ($39.71 billion) based on seasonally adjusted figures, following a robust 5.2 percent gain in July.

Economists surveyed by Reuters had expected factory sales to dip 0.4 percent.

The figures came on the heels of surprisingly strong September job gains and a rosy third-quarter Business Outlook Survey from the Bank of Canada, which was seen by some analysts as testing the Bank of Canada's resolve to hold interest rates at current low levels through mid-2010.

"In our view, (speculation of a rate rise) was a premature move, as it neglected the powerful dampening pressure of the Canadian dollar, and it also overlooked the fact that the Canadian economy has a very soft underbelly in the form of weak manufacturing and export activity," said Eric Lascelles, chief economics and rates strategist at TD Securities.

"This softness came home to roost this morning."

Aerospace shipments plunged 36 percent in August, while motor vehicle sales, which normally rise in the month after July maintenance shutdowns, slid 6.3 percent.

Excluding the volatile aerospace group, sales dropped 0.6 percent in the month, but only eight of 21 industries had increases.

In volume terms, sales fell 2.3 percent, suggesting a negative impact on real gross domestic product for August.

"This also suggests that July's blockbuster gain was only temporary, lifted by the cash-for-clunkers program in the U.S., and that Canada's recovery will be slow and tepid, constrained by still-high inventory levels and a strong Canadian dollar," said Scotia Capital economists Derek Holt and Karen Cordes in a commentary.

Despite the steep monthly decline, manufacturing sales were relatively steady over the February to August period after tumbling by more than 20 percent in the previous four months.

($1=$1.03 Canadian)

(Reporting by Louise Egan and Ka Yan Ng in Toronto; editing by Peter Galloway)