Fedex disappoints; should we care?
Fedex is often seen as a general proxy for US economic activity in the way that rail or freight traffic or cargo shipments are. They ship to such a wide variety of companies and individuals that they have taken on a bellwether status. Unfortunately, they released some disappointing earnings today. Given the recent spate of moderately bullish data, should we care?
Here’s the headline that captures the essence of the story: FedEx Misses Estimates, But Hikes Forecast. Net income came in well south of analyst estimates of $1.10 at $0.89 a share. But, of course, ‘one-time charges’ were responsible because without these special charges Fedex would have earned $1.16 a share. That’s the headline stuff.
The key is that Fedex raised its 2011 profit forecast and made very bullish statements about the holiday season. CEO Fred Smith said: "We’re now more bullish about the remainder of the year based on our record-setting peak volumes and greater anticipated customer demand for our services." That sounds pretty bullish. Interestingly, Fedex runs its own internal GDP forecasts and they have pegged 2011 US GDP at about 2.6 to 2.9% – not gangbusters, but decent.
My takeaway from the Fedex stuff is that the company is raising forecasts and expects a good holiday season. If they are a bellwether, that’s a positive sign for economic growth.
The last time I talked about Fedex, I said this:
Obviously I have been downplaying the double dip talk that has escalated since the ECRI data last week because I don’t see a double dip as imminent. On the other hand, I do think the data point to a serious slowdown ahead and that US policymakers should be worried about the exacerbating impact of the European credit crisis and fiscal austerity. Moreover, US jobless claims numbers were weak at 472,000 initial claims. It will be hard for consumer spending to expand unless more private sector jobs come online.
In my view, the immediate worry is not the economy per se then. Rather it is that earnings and economic expectations are too high. I expect a weak second half. In line with these expectations, the economic data are starting to come in below expectations. This was certainly the case with both the Philly Fed and Empire State surveys. And companies are starting to ratchet down their forward earnings guidance, FedEx being the most notable example.
The second half was weaker than the first but the slowdown was less than I feared. Moreover, the jobs numbers have become moderately better in the six months since then. That sets us up for moderate growth going into the new year.
P.S. – Am I still worried about a double dip? Yes, mildly, for the same reasons I gave in June (European contagion and potential austerity with mortgages and protectionism as two other worries). But all of these issues look less problematic at present.