UPDATE 2-Canada July factory sales stronger than expected

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By Louise Egan

OTTAWA, Sept 16 (Reuters) - Canadian manufacturing sales rose more than twice as much as expected in July, up 2.7 percent from June, implying a healthy growth spurt in at least part of the third quarter.

Broad-based strength, led by durable goods industries, underlaid the sales growth, Statistics Canada said on Tuesday.

But indicators of future sales growth suggested the gains may be fleeting. The inventory-to-sales ratio, an estimate of the number of months it would take to exhaust inventories, fell to a 13-year low of 1.24. New factory orders were flat and unfilled orders were down 0.4 percent.

Analysts had, on average, expected an increase of 1 percent in the value of factory sales in July. Statscan revised downward the June sales gain to 1.9 percent from 2.1 percent.

"This report is certainly positive, and suggests that the manufacturing sector was surprisingly resilient, which has positive implications for growth," said Charmaine Buskas, senior economics strategist at TD Securities in a note to clients.

"However, going forward the boost from manufacturing is unlikely to continue. Not only are the temporary sources of support now in the rear-view mirror, but the cyclical headwinds such as a moribund U.S. economy will pose a drag on demand," she said.

The Bank of Canada forecast in July that third-quarter economic growth would be 1.3 percent and will update that forecast next month.

Many economists now see bigger risks of weaker U.S., and therefore Canadian, economic growth in the wake of the deepening financial crisis after Lehman Brothers Holding Inc LEH.P sought bankruptcy protection and Bank of America (BAC.N) agreed to buy Merrill Lynch & Co MER.N.

July marked the fourth straight month of manufacturing sales growth, the longest streak of gains since the first half of 2002, Statscan said. Much of the expansion was due to a 2 percent jump in volumes, in contrast to the price-led increases seen in the previous two months.

Durable goods industry sales overall soared 4 percent higher, driven by primary metals, transportation equipment and machinery. (Reporting by Louise Egan; Editing by Peter Galloway)