UPS: ASIAN GROWTH IS SLOWING
The macroeconomic thesis remains relatively simple in my opinion. The USA and most of Europe are in balance sheet recessions. This means that the private sector is likely to remain sluggish which will result in slow growth. Thus far, deficit spending in the USA is allowing consumers to muddle through. Austerity in Europe is depressing many of their economies. Emerging markets are relatively healthy on the other hand and have served as a crutch for the rest of the world. This has been particularly important for corporate profits where the combination of cost cuts, slow domestic growth and high international growth is creating healthy profits.
The major risks to the downside in this scenario are a worsening crisis in Europe, austerity in the USA and a slow-down in China. Europe has kicked the can once again with their most recent bailout package. This means Europe is going to remain weak as austerity takes hold. The USA is not headed into full-blown austerity yet, but the end of the fiscal stimulus combined with the possibility of harsh budget cuts stemming from the debt ceiling debates should put downside pressure on the US economy in the coming year. Still, with double digit deficits the private sector should be able to muddle through. Emerging markets are the real key here and according to UPS and their latest earnings report the picture is becoming more precarious.
Below are some snippets from this morning’s conference call:
“The current forecast call for second half GDP growth of more than 3%. Given all the uncertainty that exists in the U.S. economy, it could end up being anywhere from 1.5% to 3.5%. Bottom line, economic growth expectations have slowed from where they were at the start of 2011. ”
…Despite slowing economic growth expectations, I’m encouraged by the progress we are making.”
…Now let’s turn to the International segment. Revenue was up more than 13% on strong volume growth of 6.2%. Export volumes increased over 8% with growth around the world. Europe and China continued their momentum of solid growth, although we did see slowing in the rest of Asia.”
…Given the softness in the U.S. economy, we expect third quarter volume growth to be slow and operating margins to be similar to last year. In the fourth quarter, we expect year-over-year operating margin expansion. In International, we expect second half operating profit growth of mid-to upper teens, compared to last year as the impact of our hedging programs is mostly behind us. The Supply Chain and Freight segment will continue to see the margin expansion and revenue growth, as we expect to experience operating profit growth in Freight and strong operating margins in Forwarding.
To wrap this up, as Scott indicated, economic conditions have slowed since we last provided guidance. A good example, U.S. GDP growth expectation for 2011 was at 3.1%. It was revised downward to 2.9% and now sits at 2.5%.”
So, for now, if UPS is our guide (and they’re a pretty good one), we can expect more of the sluggish growth that we’ve been seeing although the slow-down risk in Asia appears to be gaining some momentum.
Cullen, I just saw a money base graph today on zerohedge supplied by Graham Summers of Phoenix Capital. How the hell can the money base be going vertical again after a small dip in early july given QE2 has stopped? I know they are reinvesting maturities but surely it can’t account for this trajectory? Thanks
All of this was predicted by Peter G. Peterson(advisor to multiple presidents) in his book “The Gray Dawn” @1999 See: http://www.pgpf.org/
China is one of the last places for it to hit (around 2030 according to the book, but it has been happening early in other countries for some reason). China will be the worst, because of their policy towards children and population growth. Amazingly, you rarely hear anyone talk about population/demographics as a cause for our problems except for Peterson. Occasionally, there is a reference to the ‘Boomer’ effect. You may remember the Bjorn Borg campaign to increase population growth in Scandinavian countries back in the 80′s. There was a made-for-TV documentary on the world wide subject a couple of years ago, but I can’t remember who produced it. Everyone is trying to fix it fiscally or monetarily. The Borg campaign was the only one that I know of attacking the problem by trying to adjust their population growth. The worst wasn’t supposed to hit the US until 2023 (I think), but more recent dooms day predictions I have heard have been around 2016-2018. I personally believe we may see an economic rebound before another dip. We may be one biz cycle early now. A lot of the boomers of course are in debt and will continue to work which may be a good thing. Disclaimer: I’m no economist and certainly no expert. I’m just passing on what I thought to be a very prescient book I read a couple of years ago and most of this is from memory.
Well, a picture from AMZN is certainly somewhat brighter…. Maybe they are too optimistic, maybe they are using more of other carriers. Next quarter would be a good proxy.
Cullen-
Thanks for posting! Very timely as we were just discussing the state of the economoy this morning. My colleugue feels that the US will be able to sustain a 3% GDP growth through next year; I’m somewhat more dubious. Do you have any tables or information that you can post demonstrating actual GDP returns versus the estimated returns over the past 5 years? My presumption (and it could be wrong) is that the actuals are usually less than the estimated by about 20 bps.
Thanks!