Santa Claus Delivers a Positive Quarter Despite Corporate Scrooges

The Month: Christmas Gift

Canada’s economy was buoyed by Christmas cheer as a December bounce more than offset slight declines in October and November to turn the fourth quarter positive. Unfortunately, one month does not make a trend. The key question is whether December’s strength continued into the New Year or whether economic activity reverted to the malaise evident in the labour market and other indicators.

The Quarter: Manufactured Comeback

The strongest sector was durable-goods manufacturing, which expanded by 2.6% in the fourth quarter alone. Manufacturing output has been growing strongly for four consecutive months and is starting to create jobs, as manufacturing employment recovers from an historic low.

This nascent manufacturing recovery appears to be driven by the auto industry. It validates the decision by American and Canadian governments to rescue General Motors and Chrysler. At the time, many conservative commentators wrongly claimed that these companies would fail anyway and taxpayers would never get their money back.

The Year: Profits vs. Investment

While business investment was sluggish in 2010, it picked up in 2011. However, investment continued to lag corporate profits.

Between 2010 and 2011, corporate profits jumped from 180.7 billion to 207.9 billion, a 15% increase. Meanwhile, corporate tax payments declined from 54.6 billion to 54.4 billion. As a result, after-tax profits (which are also modestly reduced by net payments to non-residents) leapt from 124.2 billion to 153.0 billion, a 23% increase.

By comparison, fixed capital investment by private non-financial corporations rose from 148.1 billion to 167.6 billion, a 13% increase. This figure remains below not only the 2008 peak but also the 2007 total (in nominal dollars). Corporate tax cuts are visibly contributing to after-tax profits, but not to business investment.

Corporate Canada continued hoarding cash. In 2011, private non-financial corporations deposited an unprecedented $50.9 billion Canadian dollars (in addition to $23.4 billion worth of foreign currency). These companies are now sitting on well over half a trillion dollars of cash.

Crown corporations were the unsung heroes of 2011. Fixed capital investment by non-financial government enterprises exploded from 16.9 billion to 22.0 billion, a 30% increase.