Industry profitability expected to rise in 2011

Ottawa, ON – Corporate profitability is expected to improve over the course of 2011, based on a strong increase in The Conference Board of Canada’s monthly Leading Indicator of Industry Profitability. The index increased by 0.6% in December 2010, its biggest one-month gain dating back to 2001 (the earliest that data is available).

Following six months of decline, the leading indicator has risen for three consecutive months. Still, the overall index has some catching up to do. Between March and September, it declined by 2.4% and it finished 2010 about 1% lower than in December 2009.

“The recent improvement of the index is thanks to stronger non-residential investment, a rising stock market and increasing raw material prices,” said economist Maxim Armstrong. “Thirty-eight of the 49 industries covered by this indicator recorded increases in December, which is the most since July 2010. Having positive profit indicators in four out of every five industries is another welcome sign, as it corresponds with periods of strong economic growth.”

Firms in the primary sector are poised for a profitable year. Demand for several raw materials has boosted both sales and prices. The agriculture and forestry industry and the mining industry posted the biggest increases of their index in December compared to a year earlier – 12.3% and 10.6% respectively.

The strong Canadian dollar has a significant effect on profitability in most of the industries covered by the leading indicator – the impact is positive for some industries and negative for others. In 2010, the exchange rate was much less volatile than in previous years, but the Canadian dollar remained very high by historical standards and is expected to remain at or near parity with the US dollar in 2011.

The Conference Board’s Leading Indicator of Industry Profitability is constructed from high-frequency data series. The indicators are designed to be predictive of movements in corporate profitability six months hence. An industry leading index is created for the economy as a whole, as well as for 49 individual sectors within the economy, thus providing coverage for most of the private business activity that takes place in Canada.