Corporations earned record high operating profits of $55.0 billion in the third quarter of 2005, a 2.9% increase over the second quarter. Profits have risen for 4 consecutive quarters, and for 13 of the past 15 quarters. Soaring oil and natural gas prices propelled energy sector profits to record highs, accounting for virtually all of the overall profit gain. Excluding the oil and gas and petroleum and coal industries, third quarter operating profits edged up 0.1%.

Chart 1
Operating profits continue to rise

The non-financial industries reported $42.1 billion in third quarter profits, a 4.6% improvement over the second quarter. Excluding the energy sector, about half of the non-financial industries turned in profit gains, but these were tempered by declines in the remaining industries. Manufacturing profits declined for the fourth time in the past five quarters.

The financial industries saw profits trimmed 2.1% to $12.9 billion in the third quarter, mainly due to lower chartered bank and credit union profits.

Chart 2
Profit growth continues in third quarter

Higher prices boost mining profits

Oil and gas extraction companies reaped the benefits of soaring oil and gas prices, as profits swelled 16.6% from the second quarter to a record high $8.7 billion in the third quarter. Natural gas export prices surged in the quarter due to production disruptions caused by hurricanes Katrina and Rita in the US South. Crude oil prices strengthened amid continuing concerns over supply.

Metal mining companies earned $1.9 billion in third quarter operating profits, up 11.1% from the second quarter. Steady increases in non-ferrous metal prices over the past few years have contributed to a more than six-fold jump in profits since bottoming out at $0.3 billion in the third quarter of 2003.

Wholesalers and retailers more profitable

Wholesalers enjoyed an 11.4% increase in operating profits in the quarter, led by wholesalers of machinery and equipment. Operating revenue rose 1.7% to $97.6 billion, extending a streak of eight consecutive quarterly increases.

Retailers also gained ground in the third quarter, as profits advanced 4.8% to $3.6 billion. Operating revenue increased 1.1% to $95.4 billion. Retail sales have been generally rising since the start of 2004, despite some monthly fluctuations.

Mixed results for manufacturers

Manufacturing profits edged down 1.2% to $10.6 billion in the third quarter, the fourth decline in the past five quarters. Gains by manufacturers of motor vehicles and parts and petroleum and coal were more than offset by weakness in most of the remaining industries. Manufacturers continue to face the challenges of rising fuel and other input costs, the robust Canadian dollar and strong foreign competition. However, the most recent Business Conditions Survey reported that slightly more manufacturers anticipated increasing production levels in the fourth quarter than those expecting production to decline.

Motor vehicle and parts manufacturers earned $0.9 billion in third quarter operating profits, up from $0.6 billion in the second quarter. Operating revenue grew 9.1%, as extensive incentive programs sustained sales. Exports of automotive products strengthened in the quarter, but remained below the peak levels of 2004. Domestic sales of new motor vehicles slipped in the latter two months of the quarter, but still gained ground for the quarter on the strength of robust July sales. The Monthly Survey of Manufacturing reported that shipments of motor vehicles were up in the third quarter, despite a hefty slide in September.

Petroleum and coal manufacturers earned record high operating profits of $3.0 billion in the third quarter, up 9.7% over the second quarter. Petroleum prices have risen steadily over the past two years, peaking in the most recent quarter on the heels of the hurricanes in the southern United States.

On the down side, primary metals producers earned $0.3 billion in third quarter operating profits, less than half of those earned in the second quarter. Rising energy costs, softening demand and lower steel prices contributed to the current quarter decline.

Wood and paper producers saw profits pared 19.7% to $0.9 billion in the third quarter. Profits have weakened for five consecutive quarters from the recent peak of $2.1 billion in the second quarter of 2004. The export market softened in 2005 and lumber prices declined, but demand from south of the border should strengthen as the US Gulf Coast rebuilds. Meanwhile, newsprint makers continued to struggle with declining markets.

Financial sector trimmed by lower bank and credit union profits

The depository credit intermediaries' operating profits retreated 6.1% to $5.4 billion in the third quarter. Within this industry, the chartered banks saw profits slip to $4.9 billion in the third quarter from $5.1 billion in the second quarter, largely due to higher provisions for loan losses and litigation claims. Credit unions also showed a decline, as their profits fell to $0.4 billion from $0.6 billion in the second quarter due to lower gains on the valuation of derivatives.

Non-depository credit intermediaries reported a 9.5% increase in operating profits to $2.0 billion. Insurance companies' profits were essentially flat at $3.2 billion, as gains by life, health and medical insurers were offset by lower profits by property and casualty insurance carriers.

Profitability ratios

The operating profit margin continued to strengthen in the quarter, rising to 8.3% from 8.2% in the previous quarter. This profitability indicator has been on an upward trend since slipping to 5.3% in the final quarter of 2001.

The return on shareholders' equity, based on after-tax profits, climbed to 11.4% from 11.0% in the second quarter. The most recent return on equity is the strongest in five years.

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Quarterly financial statistics for enterprises