October 16, 2008 / 2:02 PM / 9 years ago

August factory sales plummet on oil retreat

OTTAWA (Reuters) - Canadian manufacturing sales plummeted in August in the biggest setback for the sector yet this year as oil producers were hit by falling prices and temporary production slowdowns, Statistics Canada said on Thursday.

Sales at the factory gate slid 3.7 percent in August from July, the sharpest drop since December and much worse than the 1 percent decline analysts had predicted.

Producers of primary metals, autos and aerospace parts also saw their sales shrink dramatically in the month. In volume terms, sales also slid 3.7 percent and losses were widespread across most sectors and most regions of the country.

"The report was downright ugly, and paints a very bleak picture for Canadian manufacturing sector activity in August," said Millan Mulraine, economics strategist at TD Securities.

The Canadian dollar was at C$1.1937 to the U.S. dollar, or 83.77 U.S. cents, shortly after the report, down from C$1.879 to the U.S. dollar, or 84.18 U.S. cents, at Wednesday's close.

Manufacturers are hurting from the economic slowdown in the United States, the destination of three-quarters of all Canadian exports.

The U.S. housing market crash and pinched U.S. consumer spending have been especially devastating for Canada's forestry and auto industries. And with the U.S. economy headed for recession, the outlook for Canada's manufacturing base is worsening.

That could push the Bank of Canada further toward cutting interest rates at its meeting next Tuesday, even though domestic spending remains robust and a weaker currency will help take some of the sting out of exporters' woes.

"The tightening in credit conditions and persistent financial market volatility that is preventing any reprieve on elevated cost of capital, will also constrain activity going forward. Today's disappointing report supports the case for the bank keep policy stimulative," said Royal Bank of Canada economics research in a note to clients.

The petroleum and coal products industry contributed about a third of the decline, with sales down 7.7 percent in the month, partly due to falling prices and partly due to production snags.

"The largest contributor to the decrease was the petroleum and coal products industry, where sales have fallen by nearly C$1 billion in two months," Statscan said.

Manufacturers reported a 1.1 percent drop in new orders, the first decrease since April, and a 2.5 percent gain in unfilled orders. Inventories continued to rise for the sixth straight month, growing 0.3 percent, while the inventory-to-sales ratio leaped to 1.29 from 1.24 in July.

($1=$1.19 Canadian)

Reporting by Louise Egan; Editing by Peter Galloway

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