Indications of recession

April 22 (Bloomberg) -- Falling shipments at United Parcel Service Inc. and FedEx Corp., which together deliver 80 percent of packages in the U.S., show 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 are also struggling with soaring jet-fuel, gasoline and diesel costs 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's profit excluding one-time items may drop 12 percent to $902.9 million for the first-quarter, according to the average estimate of six analysts surveyed by Bloomberg. The company is scheduled to report earnings tomorrow. Chief Executive Officer Scott Davis declined to comment because of the ``quiet period,'' spokesman Norman Black said.

`Risks Have Increased'

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 may 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 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.''

`Coincident Indicators'

UPS and FedEx's customers include Ford Motor Co., Dell Inc., and Inc., as well as banks and law firms. That gives them exposure to almost all industries, making them ``coincident indicators'' of economic health, says 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 may have a period of no growth for 9 or 10 months, Dhawan said.

The volume decreases for the two shippers confirms ``the outlook that we are projecting for the rest of 2008 as being very bleak,'' said Satish Jindel, president of SJ Consulting Group Inc. in Sewickley, Pennsylvania, whose clients have included UPS and FedEx.

Rethinking Needs

Fuel is partly to blame for earnings erosion at UPS and FedEx, since they 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's Graf 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.

``It takes the overall cost up and that leads to scrutinizing those expenses,'' Ore said.

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's 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.

Circuit City's Response

Circuit City Stores Inc., the second-largest U.S. electronics retailer behind Best Buy Co., has lowered its shipping expenses by encouraging customers to order items on line and pick them up at one of its 1,500 stores, spokesman Bill Cimino said.

More than half of Circuit City's $1.35 billion in sales through its Web site last year were picked up at stores instead of being shipped to customers, he said.

Circuit City also offers free shipping on Internet orders of $24 or more, using UPS. To keep costs down, it takes as many as 10 days for orders to arrive.

``If it's the free service, there is a longer window'' for delivery, Cimino said.

UPS fell 62 cents to $71.90 at 4:01 p.m. in New York Stock Exchange composite trading. The stock has gained 1.7 percent this year. FedEx declined $1.88, or 2 percent, to $93.57. Those shares have advanced 4.9 percent this year.


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