FedEx: The Global Economy Is About to Get Worse

FedEx: The Global Economy Is About to Get Worse

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Is the economy reviving – or succumbing to a terminal torpor? Two fresh pieces of news out yesterday did little to contribute to investors’ understanding of what might be afoot. On the one hand, the National Association of Home Builders announced that confidence among its members is at the highest level in more than six years – since before the financial crisis began. That is another indicator that the housing market’s recovery and the rally in homebuilding stocks has some strong fundamental underpinnings – but is it possible to draw any broader lesson about the health of the economy from it?

Probably not. The other piece of news came from FedEx (FDX), whose earnings serve as one of the best proxies for the health of the global economy. The shipping company operates in pretty much every corner of the world, delivering pretty much every type of product to businesses and consumers, from spare machinery parts to new area rugs to the latest coffee makers. But Fedex announced that enough buyers of all kinds have been scaling back on their purchases that its delivery trucks have been more idle than usual of late. As a result, revenues grew only 2.6 percent in the quarter ended August 31, a fraction of the growth rate reported earlier this year.

It’s the trend that is the problem here – both for FedEx and for the broader universe of stocks in the Standard & Poor’s 500-stock index. That pattern of steady declines in the rate of revenue growth is what investors have spotted taking place across the corporate landscape.

Indeed, compared to its peers in the S&P 500, which eked out average earnings growth of only 0.8 percent during the second quarter of 2012, FedEx’s results were pretty good. The growth rate for companies’ sales or revenues began contracting a year ago. Now, analysts expect earnings for the soon-to-be-completed third quarter to fall relative to last quarter and to the third quarter last year.

Still, investors had been hoping for better, despite FedEx’s warning earlier this month that it wouldn’t deliver robust results and that it might trim its future outlook. It did just that: For the three-month period that currently is underway, the company said it now expects to earn only $1.30 to $1.45 a share, compared to a previous consensus estimate of $1.67. No wonder the stock price dropped more than 3 percent after the news hit the market.

FedEx blamed a sharp slump in global manufacturing activity and thus in global trade. Indeed, recently the CPB Netherlands Bureau for Economic Policy Analysis reported a surprisingly slow 2.6 percent growth in global trade volumes for the second quarter; over the last two decades, a period that has included a handful of slumps in both North America and overseas, the average growth has been 6.1 percent.

But then, this time it is different. Not only have national economies become increasingly entwined with the global economy with each year that has passed, but this time around, the economic slump is hitting virtually every major power at roughly the same time. The United States is ailing; Europe is feeling worse and in China, the symptoms are growing.

Moreover, it has become harder for investors to find a place to take shelter. Historically, when the U.S. economy has flatlined or grown only at a snail’s pace, American companies have turned more to global markets to help them offset that trend and investors have been able to obtain better returns from those multinational companies.

RELATED: Big Brands Already Hurting from Global Slowdown

Now, FedEx’s results seem to be telling us that may not be a panacea. Cummins Inc. (CMI), which makes heavy trucks and engines and sells to Brazil and China, announced a 4.1 percent decline in second-quarter sales; revenues from China plunged 25 percent. Even technology companies like Analog Devices (ADI) are blaming global economic trends for actual or potential earnings and revenue shortfalls.

The bottom line is that this could be the first time since the financial crisis was still raging in 2009 that earnings growth turns negative. You can certainly take shelter in the housing market, but anyone with a diversified portfolio is likely to feel the pain to some extent. It’s time to batten down the hatches and ride out the squall, while praying it doesn’t turn into a heavier storm.