WRAPUP 1-Canada factory, housing data show slowing recovery

* Motor vehicles, parts explain factory sales gain

* Data show recovery on track but pace is slowing

* Home resales, listings fall in June

* Interest rate hike expected on July 20

By Louise Egan

OTTAWA, July 15 (Reuters) - Canadian manufacturers saw solid sales gains in May but the pace of growth slowed and along with data showing a cooling housing market added to the impression of a gradual, drawn-out economic recovery.

Factory shipments rose 0.4 percent from April, twice the rate expected, while new and unfilled orders also increased at healthy clips, a Statistics Canada report showed on Thursday.

Meanwhile, the Canadian Real Estate Association (CREA) said sales of existing homes fell 8.2 percent in June from May and new listings also fell, signaling the housing sector will not be the big driver of growth in coming quarters that it was in 2009 and early 2010. [ID: nN15197913]

The figures were still more upbeat than U.S. data on Thursday on industrial production and producer prices, which provided more evidence that the recovery in the United States is on shaky ground.

Canadian manufacturing sales have risen for eight straight months but are still well below pre-recession levels. Gains so far in the second quarter have been milder than in the first quarter when the average monthly growth was just over 1 percent. Statscan's revised figures showed sales expanding by 0.4 percent in April.

Markets had expected an overall sales increase of 0.2 percent in May even though trade figures released this week suggested a bigger jump in manufacturing exports.

Most of the details in the report showed the sector, hammered by weak U.S. demand for Canadian exports, continues to crawl back after massive layoffs and plant closures during the recession.

The 0.4 percent increase in volume terms was also an encouraging sign for economists, who had begun to suspect a sharp second-quarter slowdown after the economy stalled in April and posted a trade deficit in May.

"The reported 0.4 percent rise in the volume of sales is encouraging and provides some reason for optimism that May gross domestic product will rebound from unchanged activity in April," said Paul Ferley, assistant chief economist at Royal Bank of Canada.

The housing report backed up economists' forecasts that the market would start to slow with the onset of summer as interest rates began to rise and stricter lending rules came into force. [ID:nN18184642]

A total of 33,959 homes changed hands in June, down from 37,005 in May. Sales fell in close to 70 percent of markets that CREA tracks, with Toronto and Calgary the worst hit.

Sales slid 19.7 percent from a year earlier, and by 13.3 percent in the second quarter from near-record levels in the first three months of the year.

"The June report was weak no matter how you slice it. But it comes as no surprise that the housing market continued to cooling from the record levels of activity established last year," said Pascal Gauthier, senior economist at TD Bank.

FATE TIED TO U.S.

The outlook for Canadian manufacturers is far from rosy and gains in the second half of this year are likely to be modest.

"The pace of U.S. recovery slows in the second half of 2010, the rebound of Canada's exports and manufacturing shipments will ease," said Grant Bishop, economist at TD Securities.

"The medium-term competitiveness of the manufacturing sector and its ability to diversify beyond the U.S. market will depend on investments and innovations within the sector," he said.

Nearly half of the 21 manufacturing industries reported gains in May but most of the overall increase came from the auto sector. Sales in the motor vehicle industry jumped 4.6 percent, while motor vehicles parts rose 2.8 percent.

When motor vehicles and parts are stripped out, sales edged down 0.1 percent as lower oil prices dampened sales of nondurable goods.

New orders for factory goods jumped 2.5 percent in May, unfilled orders rose 1.3 percent and inventories were drawn down to their lowest level in nearly two years, decreasing 0.7 percent.

Despite the likelihood of a more sluggish pace of economic growth, manufacturers are bracing for higher interest rates as unemployment falls and inflation rates near the Bank of Canada's 2 percent target.

The Bank of Canada is widely expected to raise its key overnight rate for a second time in two months next Tuesday to 0.75 percent from 0.5 percent. More hikes will certainly follow but the timing of those is less certain.

"External developments related to concerns about sovereign debt in Europe remain a risk to keeping the Bank of Canada on the sidelines though at the moment our view is that recent domestic data will dominate resulting in the central bank continuing to tighten gradually," Ferley said. (Additional reporting by Ka Yan Ng in Toronto; editing by Peter Galloway)