Manufacturers show surprising strength in face of global downturn: RBC

The Institute for Supply Management index found that U.S. manufacturing unexpectedly rose for the first time in three months in September to 51.6.

Canada’s RBC manufacturing purchasing manager’s index, which has been compiled only in the last year, edged up for the third straight month to 55, reaching the highest level since April.

Index readings above 50 indicate expansion in activity, while readings below that mark signal a contraction.

Both manufacturing indexes point to economies that grew in the third quarter, although modestly. That is welcome news given that most of the quarter has been beset by market and political turbulence and collapsing consumer and business confidence.

RBC chief economist Craig Wright said the results in Canada are consistent with an economy that grew about 2.5% in the third quarter, after a surprisingly weak 0.4% contraction in the spring.

“This is consistent with second-quarter data being a one-quarter wonder,” he said.

“Notwithstanding all the doom and gloom in the global economy, the Canadian economy seems to be on an improving trend since the second quarter.”

Wright said the second quarter was set back by temporary supply disruptions due to the Japanese earthquake and tsunami disaster. But manufacturing has since begun to recover.

The RBC index shows the pace of growth in both output and new orders in manufacturing quickened last month and job creation was the strongest since March.

“The latest expansion in the Canadian manufacturing sector partly reflected firms receiving a larger volume of new work in September,” the report states.

“Over one-third of survey respondents reported new order growth, with the pace of increase strong and the fastest in five months. Export orders also rose in September. Panelists linked the rise in total new work to greater demand and new client wins.”

Statistics Canada will issue the official employment numbers for September on Friday, with economists expecting a pick-up of just under 20,000 jobs.

While economic data has so far bucked the general gloom about economic prospects, economists remain unconvinced that the so-called real economy can overcome the crisis in confidence for long.

Most Canadian analysts say the chances of the second recession a mere three years after the last one have grown dramatically in the last two months, although none have made it their most likely scenario as yet.

That is not the case in the U.S., where several economists have declared the economy poised to slip into a recession later this year or early in 2012.

Markets continue to be skeptical or unambiguously pessimistic. News that Greece will be unable to meet its deficit target sent the Toronto and New York exchanges to triple-digit losses on Monday.

And federal Finance Minister Jim Flaherty said Monday that the European debt issue has the potential to derail the modest and frail recovery.

“The exposure of our banks is relatively small to the European situation, particularly in Greece,” he told reporters.

“But the knock-on effect to the world economy can be difficult, and that’s what we’ve been worried. We want the eurozone members to be decisive, to remove the uncertainty and to be clear in their commitments about what they’re going to do to solve the problem.”

Flaherty said the longer the issue remains unresolved, the greater the danger of other European countries coming under scrutiny.

“We want them to take the bull by the horns here, deal with the issues, be clear about what they’re doing and bring it to a conclusion,” he said.

Last week, Germany’s parliament passed the proposal to establish a 440-billion euro emergency fund, clearing one of the few remaining hurdles. But many analysts remain convinced it will not be enough to resolve the problem, particularly if money markets start focusing on the debt and deficit difficulties in bigger economies such as Spain and Italy.

Bank of Canada governor Mark Carney has speculated the fund may need to be expanded to one trillion euros.