UPS Confirms the Obvious: Global Economy Still Stinks

by Dan Burrows | July 12, 2013 1:29 pm

United Parcel Service (UPS[1]) on Friday joined the legions of companies slashing their earnings forecasts, to which we can only say: “What took them so long?”

U.S. economic growth is weakening and global growth is either more sluggish than previously thought — thanks to China — or downright recessionary (cough, Europe).

FedEx (FDX[2]), the No. 2 shipper after UPS, made something plainly clear when it reported quarterly earnings last month: The global economy stinks[3].

UPS and FedEx are a couple of the best economic bellwethers you can find because they serve just about every imaginable industry throughout the world. But sometimes bellwethers only tell you what you already know.

UPS’s reasons for taking a hatchet to its earnings outlook sound familiar to anyone who has been following FedEx: slower growth in Asia (led by China), overcapacity in the more lucrative air freight business and — in a related issue — preference among customers for cheaper, slower, lower-margin services.

True, in another wrinkle, UPS added that the U.S. economy has slackened recently. That’s a bit more worrisome, since UPS is more domestic-facing than FedEx. But then, we’ve had plenty of recent data pointing to slower domestic growth as well.

Given the backdrop of companies cutting guidance at record rates — and some crumbling global growth forecasts — UPS’s warning can’t come as too much of a surprise.

Companies have been slashing their bottom-line forecasts like mad ahead of earnings this season. Before the reporting period even got underway, 87 companies in the S&P 500 had reduced profit estimates for the most recent quarter, according to FactSet. That’s a record … barely. The previous record of 86 earnings warnings was set in the first quarter of 2013.

Indeed, of the total number of companies issuing updated guidance — whether positive or negative — a record 77% of them toned down their earnings forecasts. The market had plenty of warning that earnings season was going to be ugly[4].

Then there’s the case that U.S. and global gross domestic product has either been marked down or is forecast to be much worse than expected:

• In late June, we learned that U.S. economic growth was much weaker in the first quarter than initially thought. The Commerce Department said GDP grew just 1.8% in the January-to-March period, well below the prior estimate of 2.4%.
• The International Monetary Fund just cut this year’s outlook for U.S. GDP to 1.7% from 1.9%.
• The IMF now sees global growth coming in at only 3.1% for 2013, down from its prior projection of 3.3%.
• The World Bank takes an even dimmer view, cutting its 2013 global growth forecast to 2.2% from 2.4%. Europe’s GDP is expected to contract by 0.6%.
• Emerging markets are likewise sucking wind. China will grow just 7.7% this year, down from an earlier forecast of 8.4%, according to the World Bank. Other surveys of economists predict even lower growth.

UPS and FedEx aren’t acting like bellwethers so much these days. They’re confirming what is plainly apparent: Global growth is tepid and the U.S. economy slowed down in the first half of the year.

When the shippers start raising their outlooks and posting Street-beating revenue numbers, that’s when they’ll be bellwethers again, pointing to a stronger global picture.

For now, they’re just another couple of symptoms of a worldwide malaise.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2013/07/ups-confirms-the-obvious-global-economy-still-stinks/

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