OTTAWA — Canadian corporate profitability will likely continue to decline for the remainder of this year and possibly well into 2011, according to a new forecasting tool from the Conference Board of Canada.
The index, which the Ottawa-based economic forecaster began publishing in May, has been trending lower practically from the start and is expected to continue on that path for some time.
A positive index reading would indicate growing profits but with the index at minus 0.35 at the end of September, there’s no indication that overall corporate profitability will improve soon.
Michael Burt, who is responsible for the Conference Board’s industrial economics trends group, said the index compiles three to six types of data — depending on the industry — seen as predictors of future profitability.
“The idea is to try and get a feel for where profits are going over the next three to six months, based on current indicators,” Burt said.
The index would have accurately predicted the downturn in the second half of 2008, the upturn in the second half of 2009 and the softening of the economy that began in the second quarter of this year, he added.
“The indicator would suggest that we’re not yet seeing a turning point for profitability in the near term, so it would be — I suggest, based on these results — the first quarter at the earliest that we would see an improvement in corporate profitability and possibly the second quarter of 2011,” Burt said.
The index showed that 22 of 49 industries tracked registered a decline in profits between August and September, compared with profit declines in only 10 to 12 industries in the April-July period.
Among the 22 industries that saw profit slow last month: oil extraction, wood products manufacturing, chemicals manufacturing, plastic and rubber manufacturing, and gasoline stations.
Among the 27 industries that saw profit increase last month: food and beverage manufacturing, clothing and textile manufacturing, machinery manufacturing, furniture and appliance stores, building material dealers and publishing.
Burt said the high value of the Canadian dollar would have been a factor for some industries but not all. Another major factor was a slowing of new orders, suggesting a decline in demand.
“We’re attributing that for some export industries to weakness in the U.S. market and some of our other trade partners,” Burt said.
The index is mainly used by financial institutions, consulting firms, and other types of business service firms to give them an idea of how their corporate customers are performing.
In the second quarter, the readings were minus 0.23 for April, minus 0.42 for May and minus 0.57 for June. In the third quarter, the readings were minus 0.46 for July, minus 0.44 for August and minus 0.35 for September.
The only positive month captured by the index since it was launched was March, when it registered a plus 0.07.
However, when singled out by sector, agriculture and forestry — which had a major downturn between mid-2008 and the last quarter of 2009 — has been consistently positive from March through September.
The residential and non-residential construction sectors have also been consistently positive over the same period. In contrast, real estate services have been negative since April.