Downbeat UPS Sees 1% Second-Half GDP Growth
ATLANTA ( TheStreet) -- UPS (UPS) on Tuesday offered an unusually glum outlook for the world economy, as CEO Scott Davis proclaimed "our customers are increasingly nervous" and said second-half domestic gross domestic product growth would be around 1%.
UPS' results are considered to be a key indicator of the global economy because, at any given moment, the company has 6% of the U.S. GDP and 2% of the world's GDP in its system. It reported Tuesday that it missed analysts' earnings and revenue estimates and it cut full-year guidance.
"Economies around the world are weakening and our customers are increasingly nervous," said Davis, on the second-quarter earnings conference call Tuesday morning. "Current second-half economic forecasts for the U.S. are too high -- GDP growth will likely be closer to 1%."
In the company's second-quarter numbers, the most disturbing trend was a double-digit decline in exports from Asia to Europe and the U.S. "International got a little bit worse than we thought," Davis said. "The exports out of Asia really did fall off a cliff. But the more material issue has been deceleration in domestic demand."
Davis said he is seeing a rare juxtapositioning where exports are growing at a lower rate than global GDP. "The biggest driver of that is slow demand in the developed world," he said. "Europe and the U.S. both have low demand right now. That's what's causing lower numbers out of Asia.
"Going forward, the challenge is going to be domestic," he said. "We've had a lot of weak numbers in the last two months," particularly slowing retail sales and manufacturing numbers.
Davis said UPS' domestic customers are particularly discouraged by the outlook for a Congressional budget debate in January. "The lion's share of our customers (is) small businesses," he said. "Our customers read (about the budget debate). They're not going to invest, they're not going to hire people, with all that uncertainty."
Surprisingly, UPS sees growth in Europe, just as FedEx (FDX) did when it reported fiscal fourth-quarter earnings in June.
"Europe continues to be a good story for us," said Chief Financial Officer Kurt Kuehn. "Intra-regional shipments are continuing to show growth (just as) intra-Asia continues to show growth. Premium products not doing as well, but trans-European shipments on the domestic side are healthy. Europe is continuing to trade within itself."
This is potentially good news because UPS plans to close in November on its acquisition of Dutch package shipper TNT Express . The cost was €5.16 billion. While European economies are in decline, a falling euro may benefit UPS in the transaction.
"We do have a big check to write to complete the TNT acquisition," Kuehn said. "If the euro stays very low there will be some impact." The euro has dropped about 10% since the deal was announced, he said.