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FedEx, UPS Signal Export-Led U.S. Growth Momentum

FedEx Corp. and United ParcelService Inc., two bellwethers of the U.S. economy, are signalingdurability of a global recovery powered by growth overseasrather than demand at home.

Both freight companies raised profit forecasts in recentdays on the strength of cross-border shipments, especially fromAsia, reflecting confidence in trade flows even as the Europeandebt crisis threatens to weaken global demand.

While rising international deliveries suggest that a“double-dip” recession is unlikely for the global economy,they reinforce forecasts for export-driven growth amid a lengthyperiod of unemployment around 9 percent in the U.S. The relianceon foreign demand bolsters a theory espoused by PacificInvestment Management Co. that the world’s largest economy is ina “new normal” phase of slow growth.

“The international marketplace is what’s driving growth atFedEx and UPS and any other big company that has internationalexposure right now,” said David Campbell, an analyst atThompson Davis & Co. in Richmond, Virginia. He recommends buyingshares of both FedEx and UPS.

FedEx, based in Memphis, and UPS are considered gauges ofeconomic strength or weakness because they move consumer goodsand business equipment from electronics to apparel and financialdocuments.

The two companies also raised their earnings forecastsearlier this year. The last time they previously raised earningsforecasts in tandem, in July 2005 and September 2005, the U.S.economy experienced sustained growth of 3 percent for thefollowing year.

Rising Shares

Shares of FedEx rose 5.6 percent yesterday and are up 19percent from a 2010 low reached June 30. UPS shares gained 1.9percent and have risen 16 percent from their low of the yearreached in February.

FedEx forecast in a statement released yesterday thatearnings for the quarter ending in August will be in a range of$1.05 to $1.25 a share, an increase from the previous outlook of85 cents to $1.05. FedEx said volume for international prioritypackages will jump more than 20 percent this quarter.

UPS increased its full-year forecast last week to as muchas $3.45 a share, from a previous maximum of $3.30, on improvingdemand in Asia and Europe.

Unemployment has been slow to fall after reaching a 26-yearhigh of 10.1 percent in October. The economy lost more than 8million jobs during the latest recession. So far in 2010,companies have added 593,000 jobs.

Unemployment Rate

The jobless rate, which fell to 9.5 percent in June as thelabor force shrank, will average 9.6 percent this year,according to the median forecast in a Bloomberg survey ofeconomists from July 1 to July 8.

Barton Biggs, the hedge-fund manager who sold half hisequity holdings at the start of this month, said yesterday thathe has reversed course and is building up stock investmentsafter concluding the risk of a new global downturn has receded.

“I’ve definitely changed my mind to the degree of risk outthere,” Biggs, managing partner of Traxis Partners LLC, said ina radio interview with Tom Keene on Bloomberg Surveillance.“Economic data around the world in the last 10 days to twoweeks has turned more positive. It has exceeded forecasts almostwithout exception. The odds of the world slumping into asignificant slowdown has diminished.”

Global gross domestic product will grow in the second halfof the year at an annual rate of nearly 4 percent on apurchasing power parity basis, said Joseph Lupton, senioreconomist at JPMorgan Chase & Co.

Final Sales

“We’re not looking for a fundamental break in the recoveryin any way,” Lupton said. The global economy is in the midst of“a natural downshift” as factories cycle from orders drivenprimarily by inventory replenishment to business more reliant onfinal sales.

Growth in Asia is being propelled largely by demand forelectronic components, fashion apparel and industrial parts fromcountries including Singapore, South Korea, Taiwan and India,said Campbell of Thompson Davis.

“The inventory stocking that started a year ago iscontinuing, but not at the levels we’ve historically seen,”Campbell said. “Companies are keeping fewer parts on hand,which means if they need a product or component, they have touse airfreight and that’s what we’re seeing with FedEx andUPS.”

Airfreight Capacity

FedEx and UPS are also benefiting from a reduction inairfreight capacity over the last three years as carriers parkedplanes and passenger airlines including Delta Air Lines Inc.,the world’s largest carrier, got rid of dedicated freighters.

There are about 2,800 freight planes in service as ofApril, 200 fewer than at the end of 2008, according to theInternational Air Transport Association, a Geneva-based tradegroup.

FedEx didn’t forecast volume for the U.S. in the currentquarter, other than saying that growth in the Express and Groundunits is “better-than-expected.”

Volumes for U.S. packages in the Express unit have risen nomore than 3.5 percent in each of the past four quarters, andfell in each of the previous 12 quarters on economic weaknessand competition from UPS and Deutsche Post AG’s DHL Expressunit.

In typical economic cycles, UPS’s domestic volume typicallymatches or exceeds U.S. GDP.

Package Volume

The Atlanta-based company said last week that U.S. packagevolume rose 1.2 percent for the second quarter, the best resultin two-and-a-half years.

Domestic shipments will continue to grow roughly in linewith GDP for the rest of the year, UPS said, and it forecastindustrial production in the U.S. will outpace GDP.

“The business-to-business side is pretty good. Theconsumer is another question. The more attached to consumers youare, the more risk,” Kurt Kuehn, chief financial officer ofUPS, said in an interview on July 22.

UPS posted a 20 percent jump in international shipments forthe second quarter, the best results for that unit in fouryears, led by a 40 percent surge in export volumes from Asia.

“Growth in Asia has been red hot, fueled by the techsector and iPhones and handheld devices, and air freight isgoing to benefit greatly from that,” said Mark Vitner, aneconomist at Wells Fargo Securities LLC in Charlotte, NorthCarolina. “This says more about the global economy and inparticular Asia than it does the U.S.”