Canadian companies are lagging their American counterparts in productivity and some economists worry their bottom lines will suffer as a result.
At the start of November, U.S. third-quarter sales were up 7 per cent over the same period in 2009, while profits skyrocketed 30 per cent, according to companies that had already reported and consensus expectations compiled by Thomson Reuters. In Canada, third-quarter sales are expected to come in up 5 per cent, while earnings should grow only marginally higher at 7 per cent.
That productivity gap is cause for concern, some economists say.
"You normally expect some margin expansion, but [in the U.S.]that's more than you would anticipate," said Peter Buchanan, economist at CIBC World Markets, who highlighted the differences in a recent equity market report.
Typically, companies cut back in a struggling economy to boost the bottom line, but such a drastic difference between revenue and earnings growth in the U.S. suggests something else is at play. For instance, U.S. companies flush with cash are likely investing in new manufacturing equipment that allows them to produce more goods in less time.
Even though Canadian firms are late to the game, Mr. Buchanan said at least a higher Canadian dollar is finally forcing them to address productivity, as they no longer benefit from cheap exports. However, he also noted that Canadian reporting season kicks into high gear later than in the U.S., so the gap between Canada's expected 7-per-cent growth and the U.S.'s 30-per-cent boost might not be so gaping once all the numbers are in.
But there is no doubt that productivity is on the minds of Canadian business managers. In its latest quarterly business outlook survey, the Bank of Canada found these leaders are at last getting the message and doing something about lagging productivity.
In response to a more stable, slow-growth economy, the Bank noted in October that "some firms had recently increased employment to a level sufficient to meet expected demand, while others were focusing on achieving productivity gains from new equipment or new processes." More specifically, almost half of the firms surveyed said they would spend more on machinery and equipment in the next 12 months than they had in the previous year.
Addressing the productivity gap might help Canadian markets continue to outperform the U.S. in coming quarters. At the end of October, the Toronto Stock Exchange was up 7.9 per cent in 2010 while the S&P 500 came in slightly behind at 6.1-per-cent growth.
Yet economist Robert Kavcic at BMO Nesbitt Burns said Canadian companies shouldn't find too much solace in that performance. Resource stocks, particularly gold names, have pushed the index higher and created the illusion that overall corporate fundamentals are better than in the U.S.
Still, Mr. Kavcic said both Canadian and U.S. stocks should get a bump in November and December because these two months have historically produced the best equity returns.
Investors are also becoming less anxious. "The ratio of bulls to bears … has only made its way back to normal levels, leaving upside room as we move into the most festive part of the calendar for stocks," he wrote in a report.