S&P/TSX composite index data reveal that corporate Canada’s earnings continued to drop in the first three quarters of this year. But a recent Statistics Canada corporate financial report says the economy picked up in the second quarter. Although different reporting conventions account for the seeming discrepancy, StatsCan’s data support the belief the recession is ending.

Over the long term, there is a strong positive correlation between TSX earnings data and those reported in StatsCan’s Quarterly Financial Statistics for Enterprises reports. The correlation is 98% for the period between the third quarter of 2002 and the second quarter of 2009. That is about as perfect a link as you can get.

However, there are large differences between the two sets of data: TSX data represent the results of 204 companies, all large and publicly traded; StatsCan’s reports cover all businesses, including small firms, private companies and unincorporated businesses. StatsCan reports are also based on actual and estimated numbers, and are later revised, but provide a complete set of financial statements — sales and earnings, cash flow and balance sheets.

According to the TSX data, 12-month earnings from the 204 companies in the composite index dropped to $57.6 billion in the third quarter of this year from $87.2 billion in fourth quarter of 2008. The StatsCan data, surveying all Canadian businesses, show that 12-month earnings dropped to $148.2 billion in the second quarter from $192.3 billion in the fourth quarter of 2008.

StatsCan reports financial data for businesses on a quarterly basis, while the TSX has always reported only 12-month earnings and dividends (past 12 months earnings, current 12-month indicated dividends). It is StatsCan’s results for the quarter ended June that say businesses have rallied; its third-quarter report has yet to be published.

According to StatsCan, the progression goes like this: earnings dropped by 42.8% in the quarter ended Dec. 31, 2008, from the preceding quarter. Earnings dropped by a smaller proportion — 14.1% — in the quarter ended March 31 from the quarter ended Dec. 31. Data for the quarter ended June 30 show that earnings were up by 6.4% from the preceding quarter.

Cash-flow data support this change of trend. Cash flow dropped by 4.3% in the quarter ended Dec. 31 and by 52.4% in the quarter ended March 31, but jumped by 157.4% in the quarter ended June 30.

Revenue also has rallied. Al-though operating revenue dropped by 3.2% in the quarter ended Dec. 31 and by 8% in the quarter ended March 31, it increased by 1.8% in the quarter ended June 30.

In addition, there was encouragement from profit margins (see accompanying chart). These showed some improvement in the second quarter, too. Canadian businesses’ net margin (net income as a percentage of revenue) rose to 5.6% in the quarter ended June 30 from 3.7% in the quarter ended Dec. 31, according to StatsCan data. However, the high for profit margins was earlier, as the net margin was 6.3% in the two middle quarters of 2008.

Cash-flow margins paralleled the rise in net margins, going to 11.1% in the second quarter from 4.4% in the first quarter of this year.

However, not all margins have improved. Operating profit margins in the StatsCan data have fallen to 6.8% in the second quarter this year from a seven-year high of 9.7% in the third quarter of 2008.

And there are other negatives. Capital spending (cash applied to fixed assets) has continued to drop. This spending peaked at $15.2 billion in the second quarter of 2008 and has dropped progressively to reach $827 million in this year’s second quarter.

Businesses have cut expenses, but not as fast as operating revenue has fallen. Operating revenue dropped by 10.9% in the first quarter of this year, but operating expenses dropped by 8.3%. In the second quarter, operating revenue increased by 1.8% while operating expenses also increased by 2%.

On corporate Canada’s balance sheet, the 2009 Q2 news includes a 0.7% drop in total borrowings and a 2% rise in shareholders’ equity. Retained earnings, a measure of reinvestment and growth, increased by 3.2%. The strength of the past business expansion is revealed by the RE, which has increased in all but six of the past 30 quarters. IE