Corporate profits are among the hardest-hit indicators in recessionary episodes, and unfortunately this time around the situation is no different: Canadian corporations saw profits tumble sharply for three successive quarters through mid-2009.
Corporate profits are among the hardest-hit indicators in recessionary episodes, and unfortunately this time around the situation is no different: Canadian corporations saw profits tumble sharply for three successive quarters through mid-2009. Declines cut across a broad swath of industries, but in most sectors, growth has resumed. Does this just spell the end of declines, or a decisive U-turn?
In previous recessions, the duration of ‘profit recessions’ has varied. Profits tumbled in four back-to-back quarters during 1981-82, and a crippling eight quarters from 1989 to 1991. And although there was no recession in 2001, profits still sustained a four-quarter slide. There was significant damage in each case. 2001 saw a total peak-to-trough drop of 25%. It was deeper in 1981-82, when profits collapsed by 37%, a bad fall, but still well shy of the 52% jolt in 1989-91. The current hit to profits was comparatively short, but very sharp, at 45%, not a surprise, given the recent recession’s magnitude.
Most industries felt the brunt of the profit plunge. Primary industries and the manufacturing sector saw sharp contractions close to the national average. Results differ within the manufacturing sector, with the motor vehicle and parts sector being particularly affected. Declines in the real estate sector were comparatively modest, together with health care and education firms and services related to tourism and culture. Hardest hit was the oil and gas sector, where profits fell by almost 70% from peak levels.
In general, profit margins fared better, suggesting rapid action by businesses to contain costs. Just under half of key goods-producing industries actually saw no change or churned out an improvement in margins during the period where profits were falling. Margins were particularly resilient in non-energy mining, the electronic products industry, and in non-financial services, while many other industries held the line. Margins fell fastest in the auto parts and oil & gas sectors, although unlike the latter, auto industry margins actually swooned deeply into the red, and have yet to emerge.
On balance, a pretty rough picture for the economy. But the latest figures are more hopeful. A recent release showed a 19% profit rebound in the final six months of 2009. Sure, this still leaves profits 35% below peak levels, but the increases compare favourably with history. In 1982, profits managed to eke out paltry 1.9% growth in the 6-month period following the plunge. 1991 was better, but in the same timeframe, only managed a 7.9% increase. Only 2002 outdid current performance, at 24%, but then again, the overall world economy was in much better shape at that point.
Is the recent upsurge in profits lopsided? Far from it – all industries have participated. Those that experienced the greatest drops have generally seen the most aggressive rebounds. Thanks to a third quarter 2009 surge, manufacturing profits are up 46% from the trough, and the oil & gas sector is up 24%. A late-year jump in the finance and insurance industry lifted profits by 20%. Even so, most industries remain well below the high-water mark. Notable exceptions are the agriculture and real estate sectors, where by year-end, profits had modestly surpassed previous peak levels.
The bottom line? Profits were stung by the recession, but rapid rationalizing by businesses, a resilient domestic economy and aggressive public stimulus have contributed to an unusually aggressive bounce that will serve Canadian firms well as global recovery gains momentum through 2010.
