FedEx: Global economy about to get worse

Revenue grew only 2.6% last quarter -- a fraction of the rate seen earlier this year.

By The Fiscal Times Sep 19, 2012 2:22PM
Image: Globe with money (PhotoAlto/SuperStock)By The Fiscal Times logoSuzanne McGee

Is the economy reviving or succumbing to a terminal torpor? Two pieces of news Tuesday did little to contribute to investors' understanding of what might be afoot. On one hand, the National Association of Home Builders announced confidence among its members is at the highest level in more than six years -- since before the financial crisis. That is another indicator that the housing market's recovery and the rally in homebuilding stocks have some strong fundamental underpinnings. But is it possible to draw any broader lesson about the health of the economy from it?

Probably not. The other piece of news came from FedEx (FDX), whose earnings serve as one of the best proxies for the health of the global economy.

The shipping company operates in pretty much every corner of the world, delivering pretty much every type of product to businesses and consumers, including spare machinery parts, area rugs and coffee makers.

But FedEx announced that enough buyers of all kinds have been scaling back on purchases that its delivery trucks have been more idle than usual. As a result, revenue grew only 2.6% in the quarter ended Aug. 31, a fraction of the growth rate reported earlier this year.

It's the trend that is the problem, both for FedEx and the Standard & Poor's 500 Index ($INX). That pattern of steady declines in the rate of revenue growth is what investors have spotted.

Indeed, compared with those of its peers in the S&P 500, which eked out average earnings growth of only 0.8% during the second quarter of 2012, FedEx's results were pretty good. The growth rate for companies' sales or revenue began contracting a year ago. Now analysts expect earnings for the soon-to-be-completed third quarter to fall relative to last quarter and to the third quarter last year.

Still, investors had been hoping for better, despite FedEx's warning earlier this month that it wouldn't deliver robust results and that it might trim its future outlook. It did just that: For the current three-month period, the company expects to earn only $1.30 to $1.45 a share, compared with a previous consensus estimate of $1.67. No wonder the stock price dropped more than 3% after the news hit the market.

FedEx cited a sharp slump in global manufacturing activity and thus in global trade. Indeed, recently the CPB Netherlands Bureau for Economic Policy Analysis reported a surprisingly slow 2.6% growth in global trade volumes for the second quarter. Over the past two decades, a period that has included a handful of slumps in both North America and overseas, the average growth has been 6.1%.

But this time is different. Not only have national economies become increasingly entwined with the global economy with each year that has passed, but the economic slump is hitting virtually every major power at roughly the same time. The United States is ailing, Europe is feeling worse, and in China the symptoms are growing.

Moreover, it has become harder for investors to find a place to take shelter. Historically, when the U.S. economy has flat-lined or grown only at a snail’s pace, American companies have turned more to global markets to help them offset that trend and investors have been able to obtain better returns from those multinational companies.

Now FedEx’s results seem to be telling us that may not be a panacea. Cummins (CMI), which makes heavy trucks and engines and sells to Brazil and China, announced a 4.1% decline in second-quarter sales. Revenue from China plunged 25%. Even technology companies like Analog Devices (ADI) are citing global economic trends for actual or potential earnings and revenue shortfalls.

This could be the first time since the financial crisis was still raging in 2009 that earnings growth turns negative. You can certainly take shelter in the housing market, but anyone with a diversified portfolio is likely to feel the pain to some extent. It's time to batten down the hatches and ride out the squall while praying it doesn't turn into a heavier storm.

Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' free newsletter.

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