Outlook for profits is bright: Conference Board of Canada

The Leading Indicator of Industry Profitability Index edged up 0.3 percent in March, marking the sixth consecutive month of increases, according to the Conference Board of Canada. The steady gains are another indication that corporate profits are firmly on the path to recovery.

Of the 49 industries covered, 44 posted gains in their indexes last month, suggesting that corporate profits will continue to improve through the summer, the Conference Board said.

Strong gains in commodity prices continue to contribute to the improvement in the aggregate index, as well as to the performance of particular sectors. The high prices for grains and oil seeds, oil products, and metals point to an improving profitability outlook for many goods-producing industries. Some of the strongest monthly gains continue to be reported for industries that sell these products. In the near term, the unrest in the Middle East will continue to raise uncertainties about the supply of oil, and strong demand growth for many commodities will support a positive profitability outlook for industries such as agriculture, oil extraction and mining.

Low interest rates are another factor supporting the profitability outlook for a number of industries. Consequently, the profitability indexes for both residential and non-residential construction continue to rise. The profit outlook for manufacturing industries that make building supplies – such as wood, metal and non-metallic mineral products – is also benefiting. Low rates are also helping many service industries, including real estate, professional and scientific (e.g., engineering and architectural) services, as well as the property and casualty insurance industry.

The strong performance of the stock markets also bodes well for the profitability outlook, as stock prices tend to lead changes in profits. The TSX composite index has risen steadily since last summer. The strength in the stock market is also feeding into the profit outlook for industries within the financial services sector.

The strength of the Canadian dollar is offsetting some of the positive factors, the Conference Board explains. For example, the renewed rise of the Canadian dollar has hurt the manufacturing sector, including the paper, other transportation equipment, and furniture manufacturing industries – all of which have seen their indexes decline since last October. As well, the machinery manufacturing industry’s index has fallen 7.2 percent since January 2009.

The strong dollar is also hurting the motor vehicle manufacturing industry. This industry serves primarily the U.S. market, and the strength of the dollar, combined with the slow pace of the recovery in U.S. motor vehicle sales, is driving down the industry’s profit index. As well, the industry now faces more uncertainty as a result of the devastating earthquake and tsunami that struck Japan in March, the Conference Board says.

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