Corporate operating profits climbed 2.8% to a record $58.4 billion in the third quarter. However, three-quarters of the increase was in the petroleum refining and the banking industries. Excluding these two industries operating profit edged up a more modest 0.8%, comparable to the second quarter increase. Profit growth has slowed considerably in 2006 following average quarterly gains of 4.1% in 2005.

The non-financial industries earned operating profits of $42.4 billion, up 2.4% from the second quarter. Profits in petroleum, metal mining, construction and transportation services rose noticeably, but declines in other sectors were widespread. Among the 17 non-financial industries, only 6 showed profit gains, 2 remained essentially unchanged and 9 lost ground.

The financial industries' operating profits increased 3.8% to $16.0 billion. Profits of depository credit intermediaries (mainly chartered banks) rebounded following a second quarter dip. Companies involved in securities, commodity contracts and other financial investment activities also posted hefty profit gains.

Petroleum lifts manufacturing profits

Operating profits of manufacturers advanced 7.9% to $10.7 billion in the third quarter. However, the gain was entirely due to higher profits by petroleum and coal manufacturers, whose profits swelled 31.9% to $3.5 billion. Refined petroleum prices climbed early in the quarter, fuelled by supply concerns related to the increased instability in the Middle East, but eased back by quarter-end. The value of July shipments in the petroleum sector were the highest on record, but price declines pulled these back over the last two months of the quarter.

The remaining manufacturing industries saw profits retreat 1.0% from the second quarter. According to the Business Conditions Survey, manufacturers are anticipating tougher times ahead, with decreased production and employment in the coming months. The Monthly Survey of Manufacturing recently reported that factory shipments declined in September to their lowest level in nearly two years.

Profits of motor vehicle and parts manufacturers geared down in the quarter, falling from $173 million in the second quarter to a loss of $83 million in the third quarter. Profits have been volatile over the past several years, but have been on a downward trend since peaking at $2.5 billion in the second quarter of 2000. In the most recent quarter profits were dampened by high marketing costs coupled with some restructuring charges.

Exports of passenger autos, truck and parts declined significantly in the quarter. Domestically, incentive programs and the lowering of the GST may have contributed to a rise in the number of new motor vehicles sold in the first two months of the quarter, but sales were in decline by September.

Chemical producers earned $1.7 billion in the third quarter, up 6.4% from the previous quarter. Exports were helped by strong foreign demand for fertilizers.

Metals improve but oil and gas extraction unchanged

Metal mining companies reaped the benefit of strong commodity prices, as operating profits grew 8.2% to a record $1.3 billion. The value of metal exports continued to rise, boosted by nickel prices that have doubled since the end of 2005. Strong demand from China and other export markets coupled with low inventory levels have driven prices for many metals to unprecedented highs.

Meanwhile, profits in the oil and gas extraction industry were unchanged at $7.9 billion in the third quarter. Despite the lull, profits remained at historically high levels. Crude petroleum exports and prices eased throughout the quarter, due to high inventories and softening demand. Natural gas exports were up for the quarter, but sagged in September as high supplies pulled down prices.

Other non-financial industries

The transportation and warehousing industry earned $3.0 billion in operating profits, up 7.6% over the second quarter. Airline carriers benefited from increased passenger loads, higher fares and tighter cost-controls.

Construction companies reported $2.4 billion in third quarter operating profits, up 10.0% from the previous quarter. Construction activity in the domestic housing market remained upbeat, especially in Western Canada, buoyed by high employment levels, strong consumer confidence and relatively low mortgage rates. Meanwhile investment in non-residential building construction reflected record high spending for the quarter.

Retail profits were little changed at $3.6 billion, despite a 1.6% increase in sales. Wholesalers' profits slipped 1.0% to $4.1 billion.

Banks lead the financial sector gains

The chartered banks pulled up third quarter operating profits of the depository credit intermediaries. Bank profits increased $330 million to $6.1 billion in the third quarter, lifted by higher net interest revenue.

Companies involved in securities, commodity contracts and other financial investment activities earned 4.7% more in operating profits.

Profitability ratios

The operating profit margin edged up to 8.2% in the third quarter from 8.1% in the second quarter, just below the recent high of 8.3% registered in the fourth quarter of 2005.

The return on shareholders' equity fell to 10.7% in the third quarter from 12.0% in the second quarter. After-tax profits, the numerator in this profit measure, fell 9.3% in the quarter due to lower foreign interest and dividend revenue, reduced capital gains and higher interest expense on borrowing.