FedEx Demand Forecast Suggests Some Decent News in the Global Economy

Last week, FedEx came out with an earnings report and outlook that actually casts the global economy in a better light than many I talk to on a regular basis forecast. According to the WSJ's coverage of the quarter, FedEx executives observed that they're "seeing a moderate broad-based recovery in the global economy, driven by shipments from Asia and no signs of a downturn in Europe." Moreover, "Air-freight carriers like FedEx have been pulling planes from desert storage to meet the demand for time-sensitive shipments such as manufacturing components and consumer electronics."

Perhaps FedEx's largest growth driver has been in "overseas demand" where "a 41% increase in shipments out of Asia led to a 23% increase in fourth-quarter international-priority volume compared with a year ago." Moreover, despite the economic crisis, Europe hasn't yet seen a slowdown, and the US keeps chugging along, with domestic volume rising 1% in the quarter. All in all, that's not a bad wrap on the global airfreight and small parcel stage. Yet I believe we should look at these numbers -- especially those coming out of Asia -- as indicative of the challenges of managing the bullwhip effect coming off the floor of the recession. After all, in this environment, companies are more likely to expedite and use priority services like FedEx because of the need to meet demand in the face of new customer orders and low inventories.

Here at Spend Matters and MetalMiner, we're not yet drinking the 2010 economic recovery kool-aid -- even the somewhat watered-down kool-aid that FedEx is forecasting -- because of other signs we think will constrain growth. First among them is the European economic / debt crisis that promises to continue to get worse before it gets better. We're also deeply worried about consumer spending and the fragile housing markets, especially if the Fed begins to raise rates in an inflationary environment. There's also the specter of deflation, but don't get us started on that. Our advice to companies in this environment is to take as much commodity and supply risk off the table as possible by thinking ahead of the market versus just reacting to it. Better to come up with a directional hypothesis, plot a course, and adjust accordingly than let the sourcing sails flail in the spend wind.

Jason Busch

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