Profit Warnings Bode Ill For Economy

The profit warnings from FedEx and Ford Motor are harbingers of what’s to come.

FedEx Corp.’s recent profit warning is an omen for other corporates, observers say. On September 15, the Memphis, Tennessee–based logistics company slashed its earnings forecast and called for a half-billion dollar shortfall. The next day, shares slumped 21% in value.

“It’s definitely a negative sign, given their huge business across many sectors and historical high correlation with US GDP,” says Berenberg associate director William Fitzalan Howard, who covers FedEx in the UK.

FedEx CEO Raj Subramaniam, in a TV appearance, said volumes have been declining every week since June, and the global economy “is going into a worldwide recession.” FedEx is now reducing global flight volumes, cutting labor hours and closing locations to offset losses.

There’s a trickle effect, too. Target, a FedEx client, said its most recent quarterly profit fell nearly 90% from a year ago. Walmart, also a client, expects profits to decline between 9% and 11% for the entire year.

But FedEx’s own issues are exacerbating the situation, Fitzalan Howard adds: “Its guidance for the year was very ambitious.” Also, logistics rivals—Atlanta-based United Parcel Service and Bonn, Germany–based DHL—“said explicitly that they are not seeing the same issues as FedEx.”

Still, the profit warnings from FedEx and Ford Motor are harbingers of what’s to come, according to Amax Capital managing partner Amit Thakur.

Supply shortages aside, inflation added $1 billion to the Dearborn, Michigan–based company’s supplier costs. The news caused Ford’s shares to drop 12.3% on September 20.

The fact that Ford and FedEx are among the worst performers on the S&P 500 index this year underscores two issues “almost all companies are keenly focused on”—cost inflation and demand deflation, Thakur says.

FedEx has the benefit of catching the leading indicators of a downturn from a wholesale standpoint before many other industries. Ford, meanwhile, sees the consumer propensity for capital spending based on sentiment about the near future, Thakur explains.

“These are just the first few players and industries,” he says. “I expect many more companies talking publicly about the expected slide.”