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Lower shipping demand points to U.S. recession, rebound unlikely in '08
By Mary Jane Credeur
Bloomberg News
Published on Wednesday, Apr 23, 2008
Falling shipments at United Parcel Service Inc. and FedEx Corp., which together deliver 80 percent of packages in the U.S., are another sign the economy is in a recession and unlikely to rebound this year.
UPS, whose domestic volume has outperformed the gross domestic product for almost a century until last year, said April 8 that deliveries dropped in the first quarter.
UPS also said earnings for the three months through March will miss its previous projection by as much as 7.4 percent, just the third time the Atlanta-based company has made a new forecast that was below an earlier one.
FedEx's U.S. shipments dropped 2 percent last quarter, and the company said last month it would have ''limited earnings growth'' this year because of the slowing economy.
Both companies also are struggling with soaring costs of jet fuel, gasoline and diesel after crude oil surged 80 percent in the past year.
''This is what a recession feels like,'' said Steven Marco, who manages $800 million including UPS shares at Marco Investment Management LLC in Atlanta. ''The trucks are not as full as they used to be.''
UPS' profit excluding one-time items could drop 12 percent to $902.9 million for the first quarter, according to the average estimate of six analysts surveyed by Bloomberg News. The company is scheduled to report earnings today. Chief Executive Officer Scott Davis declined comment.
UPS Chief Financial Officer Kurt Kuehn said at a March 12 investor presentation that 2008 will be ''challenging'' because of the cooling economy and that the ''downside risks have increased'' for volumes.
FedEx's profit for the fourth quarter ending May 31 could drop 14 percent to $525.1 million, according to the average of five estimates in a Bloomberg survey. Chief Financial Officer Alan Graf said last month that lower demand for express shipments in the U.S. will continue into fiscal 2009.
UPS, General Electric Co. and the railroad Union Pacific Corp. are among the bellwether companies economist Chris Rupkey considers when making forecasts. Union Pacific's automotive volume fell 13 percent and lumber is down 27 percent for the first 14 weeks of this year. Two weeks ago, GE said 2008 earnings will miss its previous forecast.
''All three have seen a slowdown in their businesses, and this could presage a sharper downturn in the economy than we are anticipating,'' said Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ''It was likely a very weak first quarter based on UPS and FedEx shipments.''
UPS and FedEx's customers include Ford, Dell and Amazon, as well as banks and law firms. That gives them exposure to almost all industries, making them ''coincident indicators'' of economic health, said Rajeev Dhawan, director of the economic forecasting center at Georgia State University in Atlanta.
Drops in U.S. shipments, coupled with job losses and tighter bank lending standards, signal that the economy probably entered a recession in November or December, and might have a period of no growth for 9 or 10 months, Dhawan said.
UPS and FedEx typically have a two-month lag in recovering expenses through surcharges. Both companies plan to boost their surcharges for air shipments to 25 percent next month, from 20 percent, which FedEx said is causing some customers to ''rethink'' their shipping needs.
Shipping now makes up 5 percent to 10 percent of most manufacturers' costs, up from 3 percent to 5 percent a couple years ago, said Norbert Ore, chairman of the Institute for Supply Management's manufacturing survey committee.
More companies are looking for ways to reduce shipping costs, by choosing less-expensive options such as ground delivery, Ore said.
Sending a 2-pound package from the Empire State Building in New York to the Sears Tower in Chicago can cost as much as $82.50 for UPS' Next Day Air Early A.M. service that guarantees delivery by 8 a.m., according to UPS's Web site.
That same package can be delivered within two days by the U.S. Postal Service for $6.20.
Falling shipments at United Parcel Service Inc. and FedEx Corp., which together deliver 80 percent of packages in the U.S., are another sign the economy is in a recession and unlikely to rebound this year.
Get the full article here.
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