Manufacturing Profit Margins, The Canadian Dollar and GDP Growth

Two weeks ago Rob Gilroy posted some fascinating research by National Bank on the profit margins of various manufacturing industries and how they would be affected by a 5% appreciation of the Canadian dollar:

Note that profit margin reduction differs between manufacturing industries.  This is due to the different exporting profiles of different industries (the proportion of sales made within Canada vs. within the United States vs. outside of North America) and what proportion of expenses are priced in U.S. dollars.  I was so fascinated by this research I ended up presenting to my class.  I was reminded of it again when Prof Gordon posted Q3 GDP data.

The StatsCan GDP by industry press release contained the following:

Manufacturing grew 0.5%, with 13 of the 21 major groups advancing. Manufacturers of non-durable goods increased their production by 0.8%, notably of chemical products. Durable goods manufacturing advanced 0.2%, led by fabricated metal products, furniture, machinery and non-metallic mineral products. Conversely, the manufacturing of primary metal products decreased in August after a gain in July.

Recalling that the chemical industry has one of the highest profit margins in manufacturing according to National Bank research (though one of the ones most affected by a rise in the loonie), I decided to see whether or not there was a relationship in July between industry level profit margins and industry level output growth.  If there is, it is a relatively weak one.  Here are the GDP growth in each industry in July, ranked order by industry profit margin:

Computer and electronic product manufacturing - [334]     0.85%
Non-metallic mineral product manufacturing - [327]     4.08%
Chemical manufacturing - [325]     3.54%
Printing and related support activities - [323]     0.86%
Food manufacturing - [311]     -0.86%
Beverage and tobacco product manufacturing - [312]     1.76%
Plastics and rubber products manufacturing - [326]     1.58%
Machinery manufacturing - [333]     2.03%
Primary and fabricated metal products manufacturing - [33A]     -1.25%
Miscellaneous manufacturing - [339]     -1.90%
Furniture and related product manufacturing - [337]     6.15%
Textile, clothing and leather product manufacturing - [31X]     -0.17%
Wood product manufacturing - [321]     -0.57%
Electrical equipment, appliance and component manufacturing - [335]     1.93%
Paper manufacturing - [322]     1.13%
Transportation equipment manufacturing - [336]     -1.24%

The furniture and related product manufacturing growth rate really jumps out.  I wonder why there's such high growth in an industry with a very low profit margin?

Comments

[Jim Rootham]

Is it shipping cost dominated?
What component of the industry is growing? Bespoke furniture will sell well in a skewed income economy.

[the_iron_troll]

How does this square with your breaking up of industry into four broad types in: http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/10/more-on-canadian-dollar-innovation-industry-and-the-trefler-piece.html

Does this mean that the question is now answered on manufacturing, and loonie appreciation is definitely a bad?

[Mike Moffatt]

"Does this mean that the question is now answered on manufacturing, and loonie appreciation is definitely a bad?"

Not necessarily - it depends on the industry and the company. But on average it certainly appears to be more bad than good. Note that the margin reductions for even the hardest hit industries here is under 3 points (and for some industries, it's negligible). For a service company that is heavily dependent on labour, the margin reduction will be a lot closer to 5 points.

[Mike Moffatt]

Also note that the chart has 19 industries whereas the StatsCan grouping has 23, so there may be other manufacturing industries not listed affected in different ways.

[Just visiting from Macleans]

The furniture and related product manufacturing growth rate really jumps out. I wonder why there's such high growth in an industry with a very low profit margin?

Pre HST housing peak?

[Jay Myers]

In August, furniture recorded a 1.6% year-over-year decline in sales. If production is rising, clearly prices are falling significantly and/or inventories are increasing (less likely). Furniture has been hard hit by import competition as well as the impact of dollar appreciation on export pricing, and furniture producers selling into retail chains are also facing significant downward pricing pressure.