June 3, 2008
Economic Snapshot - May 30, 2008
Outlook for non-residential investment continues to deteriorate in 2008
In first-quarter 2008, operating profits of Canadian corporations fell by 1.1% following a slightly smaller 0.9% decline in fourth-quarter 2007. There were three key contributors to this first-quarter weakness:
(1) continued slowing growth in the United States;
(2) deteriorating domestic credit conditions due to the sub-prime mortgage crisis; and
(3) steady increases in labour costs.
Although quarter-over-quarter growth in profits has declined over the past two quarters, profits in first-quarter 2008 were up by 5.1% compared to the first quarter of 2007, when profit growth rose 3.1% over first-quarter 2006.
The following is a look at quarter-over-quarter operating profits across industrial sectors in the first quarter of 2008:
Financial services: -11%; transportation and warehousing: -8.4%; construction: -8.1%; wholesale trade: -3.1%; manufacturing: -2.3%; oil and gas: 3.1%; mining (excluding oil and gas extraction): +6.1%.
In the retail trade sector, sustained strong growth of consumer spending, due to recent healthy increases in disposable incomes and employment, boosted quarter-over-quarter profits by over 6.5% in the first quarter. This sector also saw a 6.2% quarter-over-quarter rise in the final quarter of 2007.
Nevertheless, the fact that operating profits have fallen for two consecutive quarters is a clear precursor of slowing investment spending in 2009. Having said this, the fact that year-over-year profit growth is still well in the black suggests to us that private-sector investment spending is likely to continue to contribute to overall growth during the remainder of 2008.
It should be noted that, while private-sector spending is likely to slow in the coming quarters, this weakness should in part be offset by sustained growth of public-sector investment. This expectation is based on the results of Statistics Canada’s latest survey of Public and Private Investment Intentions.
John Clinkard has over 30 years experience as an Economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.
Corporate Profits vs Business Non-Residential Investment
Data source: Statistics Canada/Chart: Reed Construction Data - CanaData.
