Why FedEx and UPS Are Better Economic Indicators than Alcoa

I have been looking forward to the Alcoa (AA) earnings report, due out later today, because of what it suggests about the economy. As the economy bottoms, the fortunes of cyclical companies that are leveraged to the overall state of the economy turn up. As Alcoa is the first company to report every earnings season and it is an cyclical basic industries company, its earnings report have been seen as an economic bellwether for some time. But is this set to change?

Alcoa Inc, whose results are traditionally viewed as an indicator of the country’s economic health, is expected to post a third consecutive quarterly loss this week.

But many on Wall Street no longer see the aluminum producer’s numbers as a bellwether portending either a deeper recession or an easing of the global downturn.

"It’s a large company in a major industry and it is the first to report, so it gets special recognition," said Joseph Battipaglia, a market strategist at Stifel Nicolaus & Co in Yardley, Pennsylvania.

"But it’s only telling you about the health of the aluminum industry and that’s not very good right now.

"FedEx and UPS are better signs of a change in direction," he added, referring to the two largest U.S. shipping or package-delivery companies. "I wouldn’t take what Alcoa says as a significant indication of how the American or global economy is faring."

Battipaglia said that even if Alcoa — the first member of the Dow Jones industrial average to release earnings — reported an upsurge of orders on Wednesday, it was no real sign of a turnaround. Most customers let their inventories go down in recent months, he noted, and were now restocking while aluminum prices are relatively low.

Battipaglia’s comments are significant for two reasons. First, there is the fact that we may well be seeing an inventory-induced uptick in the economy right now. It is far from clear that the economy has bottomed in a sustainable way. I made this point in my recent post, “ISM: Is this the mother of all inventory corrections?.

To be sure, I do think the economy is bottoming and that a technical recovery will ensue late this year or early next year. However, I am willing to entertain the notion that a balance sheet recession for U.S. consumers has created conditions in which this view could turn out to be optimistic.

The second reason I believe Battipaglia is on to something is that UPS and FedEx (FDX) are more representative of overall economic conditions these days. In my post “If FedEx is losing money, you know the economy is in bad shape” I said we should worry about what FedEx’s numbers are saying about economic growth in America.

Last month I said that June was significant for two reasons. First, we are going to get our first test of data that could disappoint, which would spell trouble for an overbought market. But, just as important, we need to watch the industrials because there is going to be no sustainable recovery unless these cyclical companies are leading the way. If the recent awful earnings report from FedEx is any indication, this sector is still in a world of hurt. The Globe & Mail has a good take on how this is shaping up.

So, certainly look toward the Alcoa earnings report today for signs of economic direction. However, keep in mind that we have already seen FedEx’s numbers and they are not good. UPS reports on 23 Jul 2009. Let’s have a look at what those numbers are telling us as well.

Source

What does Alcoa’s expected loss mean for the economy? – Reuters

Comments

[conceptwizard:]

It will indeed be enlightening to review the earnings reports in June. I am however concerned that some of the major issues on a recovery have nothing to do with earnings. Some of the major issues that can be deal breakers are

1. Housing not recovering
2. Retail Sales
3. Dollar Devaluation
4. The Economic state of California, this effects the whole GDP of the USA.
5. Consumer spending
6. China/ Russia buying/not buying treasuries.
7. The outcome of Goldmans Admission of software stolen from them that had/has the potential to manipulate markets. I believe this will trigger a very serious response from the retail investors, as this information becomes more known to the general public.
8. Potential for a new war with North Korea.
9. The Fed's ability to roll deficits.
10. A plan to address heath care/social security expenditures.
11. The Fed's concern about CRE and the impact on the Banks.

And others I'm sure I've missed...

You see the outcome of the economic recovery is so multifaceted that pure earnings, although encouraging don't point to anything sustainable. It will have a reaction in the markets as always but temporarily. We are in an atmosphere of total economic challenges, which fronts being fought in many areas.

We have major issues on the horizon that will determine the outcome of the nation.

Jul 08 11:16 AM

[John Galt:]

You might also want to take a look at the Railroads as a leading indicator. You don't even have to wait until the earnings reports, you can look at a site like Railfax or the company websites of some of biggest railroads: Union Pacific, Burlington Northern, Norfolk Southern etc.

Some people also look at the Baltic Dry index or some of the international shippers to see the volume of commodities being moved.

I agree though that Fed Ex/UPS are economic bellwethers.

$

Jul 08 11:18 AM

[pftittl:]

I concur on the railroads. IF they're idle, the green shoots are coming up brown.

Jul 09 09:15 AM

[Edward Harr...:]

Yes, Warren Buffett says he follows railroad freight traffic as a gauge of the economy. The DOT does an index called the Freight Transportation Services Index (TSI). Here is the web page where you can get their updates:

www.rita.dot.gov/press...

This index is down 15% year-on-year and at it's lowest level since 1997. The worrying part is that it is still declining.


On Jul 09 09:15 AM pftittl wrote:

> I concur on the railroads. IF they're idle, the green shoots are
> coming up brown.

Jul 09 12:13 PM

[Steven Hansen:]

freight transportation - especially trucking, rail and sea containers are powerful indicators as literally our entire commerce system flows through them.

they will lag slightly the usual indicators of manufacture and employment (which are the primary elements of the nber's recession ending indicators) - but are able to quantify more quickly. so transport will be the first indicator we will see rising.

in my mind, ups and fedex being biased more towards the consumer market - are indicators of consumer consumption more than industrial production.

but i am willing to make a bet that the management at alcoa will see the beginning of recovery before any other indicator.

Jul 09 07:17 PM