Corporate profits continued to climb in the second quarter of 2005, rising 2.9% from the first quarter to $51.9 billion. Soaring oil prices lifted oil and gas extraction and refining profits to record highs, accounting for three-quarters of the overall profit gain. Profits have risen in 12 of the past 14 quarters, although the growth rates have moderated in the past three quarters.

Chart 1
Operating profits up again

The non-financial industries posted a profit increase of 4.2% in the quarter. The financial industries saw their profits slip 1.0% due to lower bank profits..

On a year-over-year basis, second quarter operating profits were up 5.2%, following an 8.9% improvement in the first quarter. Year-over- year profits have risen for twelve consecutive quarters, but the growth rates in 2005 are well below the 20.5% average quarterly year-over-year increases in 2004.

Chart 2
Moderate growth continued

Gushing oil prices propelled energy profits

Crude oil prices at an all-time high of $60 US a barrel by quarter-end spelled good news for oil and gas extraction companies. Profits of $7.3 billion were 8.9% above those earned in the first quarter and have risen 76.1% over six straight quarters of growth. Hefty worldwide demand and concerns over supply disruptions contributed to the upward pressure on crude oil prices in recent months.

Metal mining profits continued to shine, rising 15.0% to $1.6 billion. Thriving demand from Asian and North American markets have strengthened non-ferrous metal prices, fostering a five-fold profit increase in the past two years.

Manufacturing slipped despite strong petroleum profits

Manufacturers earned $10.3 billion in second quarter operating profits, down 1.7% from the previous quarter and 17.4% below the recent high recorded in the second quarter of last year. Profits improved in four of thirteen manufacturing industries, led by strong gains in petroleum and coal. However, these increases were more than offset by declines in six industries, while three industries were virtually unchanged from the previous quarter. The June Monthly Survey of Manufacturing reported that total shipments edged down in the second quarter, and growth has essentially plateaued since October 2004.

Petroleum and coal manufacturers earned a record $2.7 billion in second quarter operating profits, up 22.7% over the previous quarter. The average price of refined petroleum, as measured by the Industrial Product Price Index, has increased for six consecutive quarters, rising almost fifty percent in that period.

Motor vehicle and parts manufacturers recouped some of last quarter's lost ground, as profits rose to $0.2 billion from $0.1 billion in the first quarter. However, results paled in comparison to the latest peak of $1.2 billion earned in the second quarter of last year. Exports of passenger automobiles and chassis sagged in the quarter and motor vehicle production has slowed. Extensive buyer incentive programs are helping sales, but rising gasoline prices may curtail demand for new motor vehicles in the months ahead. 

The trend for profits of wood and paper producers has been on the downswing in the past year. Second quarter operating profits dropped 20.7% to $1.2 billion. Profits recently peaked at $2.1 billion in the second quarter of 2004. Exports of forestry products are down in 2005, and lower lumber prices reflect a softening in demand. The ongoing dispute with the US over softwood lumber export duties, the strong Canadian dollar and high energy costs continued to dampen profits in this sector. 

Chemical, plastics and rubber products manufacturers took a hit this quarter, as profits tumbled 20.0% to $1.6 billion. Fabricated metal product and machinery manufacturers saw profits slide 11.0% to $0.8 billion, while profits in the primary metals industry were unchanged at $0.7 billion.

Retailers buoyed by strong consumer spending

Despite some volatility, overall retail sales and profits continued to strengthen in the second quarter. Operating profits increased 9.0% following a 7.4% rise last quarter. Four of five retail sectors reported profit gains. Leading the way were food and beverage stores (+17.5%), furniture, home furnishings and electronics stores (+14.8%) and clothing and department stores (+9.2%). Low interest rates, high levels of employment and strong consumer confidence have stirred consumers to loosen their purse-strings in the past year.

Other non-financial industries

Companies involved in transportation and warehousing activities reported an 11.3% jump in second quarter profits. Stronger profits of telecommunications carriers (+6.7%) lifted information and cultural profits by 5.9%.

Financial sector trimmed by lower bank profits

Overall profits in the financial sector declined 1.0% to $12.6 billion. Profits have been somewhat fickle over the past year and a half, increasing and declining in alternate quarters. Nonetheless, recent profits have hovered around all-time high levels.

The depository credit intermediaries (dominated by chartered banks) earned $5.5 billion in second quarter operating profits, down 5.6% from the record high profits earned in the first quarter. The second quarter decline was primarily caused by lower net interest and trading income.

Insurance company operating profits rose moderately (+1.1%) to $2.9 billion in the quarter, as gains by life insurers were largely offset by lower profits by property and casualty insurers.

Profitability ratios

The operating profit margin climbed to 8.0% in the second quarter from 7.9% in the first quarter. The average quarterly profit margin has steadily improved over the past three and a half years from 6.2% in 2001.

The return on shareholders' equity, based on after-tax profits, strengthened to 10.4% from 9.9% in the previous quarter, ending two quarters of declines. The second quarter improvement was a result of higher operating profits and capital gains.

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Financial statistics for enterprises