A sharp increase in automotive production boosted activity in Canadian factories in July, leading to a 1.7-per-cent rise in shipments to $43-billion.

The stronger-than-expected reading was "a welcome relief after three straight declines during a dismal second quarter," said Sherry Cooper, chief economist at BMO Nesbitt Burns Inc.

The gains in shipments were widespread, with 16 of 21 industry groups showing improvement.

Attractive incentive packages, low interest rates and a rebounding U.S. economy helped boost shipments of motor vehicles, which posted a 7.6-per-cent increase to $5.7-billion, Statistics Canada reported yesterday. Excluding autos, shipments rose 1 per cent, aided by higher exports and rising industrial prices.

June's shipments were revised upward, to show a decline of 0.4 per cent from the previous month rather than the 0.5-per-cent drop originally reported.

New orders rose for the second consecutive month, increasing 2.1 per cent to $42.5-billion, while unfilled orders fell 1.2 per cent to $39-billion, the 11th monthly decline. Unfilled orders are generally considered a reliable indicator of future shipments.

From a year ago, unfilled orders have fallen 16.1 per cent. Inventories fell 0.3 per cent in July, the third month of declines.

New orders are being filled by current production and out of inventories rather than supporting future production activity.

"The widespread gain in shipments in July is clearly good news, and may be an early sign that the recent improvement seen in many U.S. economic indicators is beginning to spill over into Canada," said Adrienne Warren, senior economist at Bank of Nova Scotia.

However, caution is warranted, since monthly manufacturing reports are volatile, and the gain in shipments in July erases less than half of the 4.2-per-cent decline in the second quarter, she said.

In August, shipments will get a boost from higher petroleum prices, but this will be offset by the effects of the electricity blackout in Ontario that temporarily shut many plants in the province, she said.

Manufacturers of big-ticket items were primarily responsible for the strong start to the summer, Statscan said, with shipments of durable goods rising 2.4 per cent to $24.5-billion, making up ground lost earlier in the year. In addition to the gain in the auto industry, machinery makers reported an 8.6-per-cent increase to $2-billion. As well, higher industrial prices for primary metals contributed to a 3-per-cent increase in shipments of primary metals, the first increase in six months.

However, shipments of computers fell 10.4 per cent to $1.4-billion, the fifth decline in six months, and food shipments fell 1 per cent to $5.2-billion. A drop in seafood production and packaging took place as the industry began winding down for the season.

Export markets for Canadian beef remained closed in July for the second straight month after a single case of mad-cow disease was found in Alberta. Shipments of slaughtered animals rose 3.3 per cent during the month to $664.9-million because of higher domestic consumption, following a hefty 14.8-per-cent decline in June.