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OTTAWA (Reuters) - The value of Canadian manufacturing shipments in March dropped unexpectedly to a near 10-year low, tempering optimism that the economy is showing signs of recovery.
Statistics Canada said on Friday that March shipments dropped by 2.7 percent to C$41.4 billion ($35.1 billion), the lowest level since the C$41.3 billion recorded in May 1999. Analysts had expected a 1.0 percent increase.
Manufacturing sales have now dropped almost 25 percent since their peak in July 2008, with most of the decline occurring between November 2008 and January 2009.
"Overall, this week has delivered up, not just in Canada, an economic picture that has challenged the markets' embrace of the green shoots story. The grass is green but the frost at night has turned the begonias black," said Stewart Hall, an economist at HSBC Securities.
Finance Minister Jim Flaherty said last week that he saw signs the recession was softening.
Statscan blamed the March drop on weak performances from durable goods industries and the primary metals products sector.
Constant dollar manufacturing sales, which are measured in 2002 prices, fell by 2.4 percent to C$38.2 billion, the lowest level since the C$37.1 billion posted in July 1998.
"March's results continue to support our view that Canada will be mired in weakness for some time yet," said Derek Holt and Karen Cordes of Scotia Capital research.
Analysts predicted the data would help pull down gross domestic product in the first quarter of 2009.
The news initially helped knock the Canadian dollar lower but by 9:55 a.m. EDT it had recovered to trade at C$1.1675 to the U.S. dollar, or 85.65 U.S. cents, up from C$1.1710 to the U.S. dollar, or 85.40 U.S. cents, at Thursday's close.
"While the data was weaker than expected, it is not really a massive surprise, given the head winds that the Canadian manufacturing industry faces," said Charmaine Buskas, a strategist at TD Securities.
"Overall, this is not great news for what was otherwise shaping up to be a decent March gross domestic product number. Moreover, it certainly does not help the first-quarter GDP outlook."
Durable goods industries posted a 4.4 percent decline in March from February, hit by a 32.4 percent plunge in aerospace products and parts and a 17.6 percent slide in motor vehicle parts sales.
Primary metal manufacturers posted a 7.6 percent drop in the value of sales. In March, 15 of the 21 manufacturing industries recorded declines, accounting for about three-quarters of total sales.
Analysts also noted the March drop came despite the second consecutive sharp rise in motor vehicle sales following an extended shutdown over the holiday period.
"If Canada didn't post any gain in manufacturing shipments in the latest reading, it's unlikely to do so on a trend basis over the summer months as auto industry shutdowns are extended," said Holt and Cordes.
Reporting by David Ljunggren; editing by Peter Galloway