Why we care that FedEx cut forecasts

The era of rising corporate profits may be over. As Nelson Schwartz wrote on Sept. 16, gains in earnings at large companies are declining, after outpacing the broader economy since the last recession. From his story:

In all, Wall Street expects quarterly profits at the typical large American company to decline for the first time since 2009.

The causes of the expected decline are many. In addition to the anemic economy in the United States, much of Europe has fallen into recession while growth in China, once white-hot, has slowed. There is also the looming prospect of automatic tax increases and spending cuts in Washington, which has caused companies to sit on the sidelines.

FedEx Corp. cut its yearly profit estimates for the fiscal year ending in May after demand for global shipping services has fallen. According to the Associated Press, “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.”

Rival United Parcel Service missed quarterly earnings expectations in July and cut its full year forecast citing the European financial crisis and the looming “fiscal cliff” in the U.S., according to the Wall Street Journal.

The Federal Reserve reinforced the weak outlook last week, announcing another round of economic stimulus through bond purchases and continued low interest rates. Industrial production also posted its largest monthly contraction since March 2009 last week, falling 1.2 percent in August.

It’s clear that corporations are feeling the effects of the economic slowdown. They’re likely also suffering since many have been holding onto cash instead of investing it in their own business. Again, from Schwartz:

After reducing spending and eliminating jobs during the recession, American companies reaped huge gains by keeping expenses down and putting off aggressively hiring new workers as growth slowly returned. Strong profits have also propelled the stock market higher, reassuring investors whose other assets, like real estate, have declined in value over the same period.

Thinking about this, my first thought was this “news” lacked the fundamental element of surprise. I’m worried about Europe and the fiscal crisis, I expect every CEO worth his/her paycheck is also concerned. But what’s most important about FedEx, UPS and others is the global nature of their businesses.

China, which is trying its hardest to take over as the world’s largest consumer, is also suffering. This is a country with a state-supported economic system. If the one-party dictators can’t keep the economic engines steaming ahead, it’s definitely going to be hard for those operating in a more capitalistic environment to keep growing.

FedEx is worried about China, according to another WSJ story:

Some China observers “completely underestimate” the impact of slowing exports despite the country’s domestic stimulus efforts, Mr. Smith said during a conference call with analysts after the company reported a slip in fiscal first-quarter profit.

Mr. Smith’s comments echo recent concerns expressed by other prominent executives. Andrew Liveris, chief executive of Dow Chemical Co. last week cautioned that destocking by Chinese clients was continuing, while small and medium-sized enterprises were suffering from a liquidity crunch. “They really are hurting, and bankruptcies are starting to occur,” said Mr. Liveris at an investor event.

That’s not a lot of good news for people struggling to make ends meet, working several part-time jobs or chronically under-employed. It’s hard to tell whether things are getting better, worse or staying the same. And if the rest of the world is any indication, no one’s sure where the global economy is heading.