Corporate profits continue to decline in September
OTTAWA: Corporate profits are down across Canadian industry, including manufacturing, and likely to continue falling, according to a Conference Board of Canada business index.
The Leading Indicator of Industry Profitability, meant to predict short-term movements in corporate profitability, has been in decline for six months. The Ottawa-based research firm said this suggests Canadian corporate profits, after falling 1.8% in the second quarter of 2010, will continue to decline throughout the rest of the year and possibly into the first quarter of next year.
The Conference Board calls the September drop “particularly troubling” because more industries recorded declines, although the rate of decent has at least slowed in the past three months. Between April and July, the declines were limited to between 10 and 12 industries each month – normal in a recovery phase, where there are always some industries lagging others. But September’s results saw 22 out of the 49 industries in decline. In manufacturing, eight sectors showed declines, the same as August but up from five in July.
Several factors affecting profits are linked to international trade, which has an impact on sectors that export, such as energy, mining and manufacturing.
“International trade factors are not as strong as they were. The exchange rate has been very high and foreign economies are taking a long time to recover, especially the US,” said Maxim Armstrong, a Conference Board economist.
The Conference Board also notes declining prices have contributed to declines in manufacturing, primary industries and services. And weak housing markets in both the US and Canada are affecting several industries.
Armstrong said the producers of products are under the most pressure because of their dependence on US markets.
“When half your customers are not buying, you’re in trouble,” he said.
Producers of concrete, cement and glass are having a hard time because of weakening in residential construction, while manufacturers of plastics and rubber products have experienced five months of declines, mostly because of flat automotive sales over the past six months. But the dollar hasn’t helped either, said Armstrong.
Machinery manufacturers have seen profits rise over the past four months, but the rate of growth has been weak, he said.
“I suspect businesses have been more confident over the past few months and took advantage of the low interest rates to buy machinery and equipment, but there’s more uncertainty so there is less confidence, which is slowing down investment,” said Armstrong.