September 19, 2012 in Business

FedEx cuts growth outlook

Slowing global economy leads package delivery company to adjust forecast
Samantha Bomkamp Associated Press
 
Output down

Output has declined in Japan, China and elsewhere in Asia. U.S. industrial production last month fell by the largest amount in more than three years as factories produced fewer cars, pieces of furniture and other goods.

NEW YORK – FedEx Corp. says the global economy is stalling, and it’s going to get worse next year.

The conditions are shrinking earnings at the world’s second-largest package delivery company. Factories are making fewer items for FedEx to ship and customers are opting for cheaper delivery options to save money.

FedEx on Tuesday cut its outlook for global growth and industrial production while slashing the forecast for company earnings. And CEO Fred Smith suggested trade has slowed to levels seen during the last two significant economic downturns.

It’s more evidence that the global economy has a way to go to a full recovery. Several countries in Europe are in recession and the U.S. is struggling with high unemployment and weaker manufacturing growth. And Smith said some experts have underestimated the severity of the slowdown in exports from China, where FedEx has invested heavily over the last several years, adding new planes to export goods and expanding its hubs and network.

FedEx’s forecasts are closely watched for signals of future economic health. Its results provide insight into the global economy because of the number of products it ships and the number of countries in which it does business. Bigger rival UPS said in July that it expects the global economy to get worse before it gets better. UPS also cut its earnings forecast.

The slow pace of economic recovery is hurting FedEx because it relies on sharp spurts of demand to feed its air network. Demand for air freight is usually strong coming out of a period of slow economic growth because retailers have whittled their inventory and need to replenish quickly when demand picks up. The current recovery in the U.S. is the slowest since World War II.

FedEx lowered its expectations for U.S. economic growth to 2.2 percent in 2012 and 1.9 percent next year. Those are mostly in line with economists’ views.

FedEx, based in Memphis, Tenn., cut its earnings forecast for the fiscal year ending in May to between $6.20 and $6.60 per share, from $6.90 to $7.40 previously.

For the current quarter that ends in November, FedEx forecasts earnings of $1.30 to $1.45 per share, compared with $1.57 per share last year. That’s well under analysts’ forecasts. FedEx will get a boost from major technology product launches, like the recently announced iPhone 5, but not enough to make up for the slowdown elsewhere.

Smith said a continued slowdown in the developed world combined with high fuel prices will keep trade volumes trailing growth in the world’s economies, mimicking a trend seen in the last two recessions.

Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, agrees with that forecast, calling the current economic expansion “lethargic.”

“Trade has been hurt significantly,” Sohn said. “… China is slowing. That hurts sales of everything from Mercedes Benz automobiles to Napa Valley wines.”

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