“I think there is a lot of whistling past the graveyard about the U.S. consumer and the United States economy versus what's going on globally,” FedEx CEO Fred Smith said during an earnings call with analysts and investors Tuesday.
“Most people don't think about the fact that when China slows down because of U.S. tariffs or uncertainty or for whatever reason, as big a victim – if you want to call it that – of the China slowdown is Europe, because Germany's contraction is because they're not selling as much to China, which is a huge customer of Europe,” he said.
Smith’s remarks came on the heels of weaker-than-expected results out the gate for FedEx’s first quarter of the 2020 fiscal year. The shipping giant – which derives about one-third of its annual revenue from international sources – missed on both the top and bottom lines, and lowered its full-year adjusted earnings per share guidance in part due to a “weakening global macro environment driven by increasing trade tensions and policy uncertainty.”
But the U.S. consumer, as Smith puts it, is still robust. Consumer spending, which comprises about 70% of domestic economic activity, jumped 4.7% in the second quarter this year, the fastest pace of gains since 2014, which helped keep quarterly U.S. GDP at 2.0% despite drags from trade-related factors like declining exports and lower inventory builds.
FedEx has been one of the more visible – and vocal – corporate casualties of the U.S.-China trade war and related bifurcation of the domestic and global economies that has come as a result, with services sectors broadly outperforming their manufacturing counterparts.
Although U.S. industrial production picked up in August after a July decline, global manufacturing PMIs remain in negative territory. Germany, the eurozone’s largest economy, has seen activity in its manufacturing sector activity plunge and hold near a seven-year low.
“And the U.S. consumer, which is a remarkable driver of growth and employment – all things that are spoken about every day – sort of mask the fact that the goods producing sector, which we’re in the midst of, is much more global in nature than the U.S. consumer, which is largely services and certain consumption,” Smith said. “So that’s the reason that we began the year the way we began it.”
‘Reacting to these macroeconomic things’
To be sure, FedEx’s financial results have also been impacted by a host of separate company-specific issues, including its decision to drop Amazon (AMZN) as a FedEx Express and Ground customer this summer and its prolonged task of integrating the European shipping company TNT Express it acquired in 2016. But its persistent woes have become an exemplum of the struggles companies face to shift their business models against a backdrop of volatile trade policies and macroeconomic uncertainty.
“Our international operations are much more sensitive to changes in global trade than our U.S. domestic operations because of the higher concentration of business-to-business shipments internationally,” FedEx said in an SEC filing Tuesday.
“The softer economic outlook is expected to create an ongoing revenue shortfall from planned levels, particularly in Europe and Asia Pacific,” the company added. “The cost of maintaining two separate networks in Europe while we execute the TNT Express integration is expected to compound the impact of the revenue shortfall on our near-term results.”
At the same time, FedEx has taken steps to try and mitigate the impact to business as a result of these factors – namely, by passing on some costs to the consumer. FedEx earlier Tuesday announced it would be increasing rates on a host of consumer shipping services starting in January 2020, including an average of 4.9% price increase for U.S. express, ground and home delivery services, along with an average 5.9% increase to FedEx Freight rates.
Smith responded to an analyst question as to why FedEx chose now to announce these price increases.
“We’re just reporting what’s going on and reacting to these macroeconomic things,” Smith said.
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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