Further Signs of Economic Decline
When it comes to economic forecasts, there are many metrics, some more useful than others, to gauge the strength or weakness of the global economy. A lot of indicators used when making economic forecasts are backward-looking, meaning they tell us what happened in the global economy, not what will happen. There are very few forward-looking indicators, but one that I like to incorporate when making my economic forecasts is to analyze what certain corporations are actually saying about the global economy. One of the best companies to research regarding the global economy is FedEx Corporation (NYSE/FDX).
FedEx tracks shipments of packages extremely closely. This is highly correlated with the global economy, as it has business in most major business centers. As businesses improve, more packages are sent. Not only is total volume important to look at, but so is the split of volume in terms of high-value overnight shipments versus slower and lower-priced shipments. What we are currently seeing in FedEx’s latest statement is that the overall global economy appears to be weaker than many have estimated in their economic forecasts. For the fourth quarter 2012, which ended May 31, FedEx stated that U.S. package shipments were 4.9% fewer than a year ago. Operating profit margins also declined from 8.4% in the year prior period to 7.8% for the quarter.
The company also stated that its assumptions in its economic forecasts are relatively decent at 2.2%, with the caveat that the firm expects a successful conclusion to the European debt crisis. The company also is incorporating a deal to keep the fiscal cliff from being enacted. These are two big ifs. The global economy is being juggled in many nations, and it creates a lot of difficulties in trying to calculate economic forecasts.
Another interesting item to consider when making economic forecasts is that customers are increasingly choosing the lower-cost segment of shipment, rather than the higher-end faster service. This is seen in the lower profit margins. The stock itself has actually done quite well considering the negative guidance it has given. Many believe management is trying to lower estimates further, this way making it easier for the firm to beat this lowered guidance. I’m not sure that’s true, considering the actual data do show a switch to lower-priced transportation products and an overall decrease in shipments. As long as we see these kinds of data coming out from FedEx and other multinational corporations, economic forecasts will continue to be reduced as the U.S. and global economy continue to weaken.