Recession or Not?
"Your eyes are too big for your stomach."
This warning would inevitably come after the macaroni and cheese but before I doubled down on dessert with chocolate pudding and green Jell-O.
When my Southern Baptist preacher grandfather Lucius Corder took the family out to dinner in Columbia, South Carolina, it meant the S&S Cafeteria. I'm sure my parents chuckled under their breath at this idea of "out to dinner," having lived the last 10 years in the big city of Richmond, Virginia.
But pudding and Jell-O? I loved the S&S Cafeteria.
For the record, no, I never once cleared my plate — I mean, tray. But I'm proud to say I've also never given up trying. To this day, I still make it an occasional habit to bite off more than I can chew. In that spirit, let's have a look at whether the $19 trillion U.S. economy is sliding into a recession!
$19 trillion is a huge number. And we should all be revising how we perceive growth with such a big number. For instance, the president likes to say GDP growth could be hitting 4% if the Fed or Congress or whoever would just do what he wants.
Do you realize 4% growth in a year would mean producing and selling an additional $760 billion worth of stuff? That would mean an added $3,840 in spending for every American household. If everybody buys a big TV, we're there. That is, if you can find a "Made in USA" TV...
Seems like GDP growth has been averaging 2% for years now. It takes $1,920 in additional spending to grow $19 trillion by 2%. That's $160 a month — much more doable.
None of these amounts seem like all that much until you consider that nearly 60% of Americans say they are living paycheck to paycheck.
We've been hearing recession talk for just about a year, ever since that big correction last October — the one that eventually forced the Fed to change tactics and begin cutting interest rates.
Just last week, Goldman Sachs said to buckle up — the ride is about to get bumpy. A Blackstone strategist is even talking bear market.
Part of the reason the so-called "smart money" is worried is that corporate earnings are not growing at all. In fact, they are shrinking...
Earnings per share for the S&P 500 were down in both the first and second quarters, albeit less than 1%. However, third quarter earnings will kick off in a couple weeks, and they could be ugly — FactSet says an overall drop of 3.5% is likely.
Last week, FedEx missed earnings and received a cordial invitation to meet investors around back in the woodshed. The stock was mercilessly beaten — from $173 to $150.
Now, FedEx (and UPS) have long been canaries in the coalmine for the global economy. It's because they track business activity closely. So when FedEx missed earning again (this was the fifth problem quarter in a row), it might be a problem...
I've told you before that I always read the transcripts from the FedEx earnings conference calls. Always good stuff.
I'm gonna bullet point what I think are the highlights from last week's call, in no particular order...
Global macro economy continues to soften, and we are taking steps to reduce capacity. We expect the current softness in air cargo demand to continue into calendar year 2020. Specifically, we will retire 20 MD-10-10 aircraft over the current and next fiscal year.
Challenges increased somewhat due to the decision to not renew our largest Amazon contracts.
Overall outlook for U.S. economic growth is down 20 basis points, currently at 2.3% for real GDP. Our outlook has changed despite consumer-driven growth of 2% in the U.S. in Q2 of CY '19. This change is because the industrial sector remains sluggish due to an inventory buildup and increased geopolitical trade tensions.
U.S. manufacturing PMI has been very weak this year. Given that, our industrial production outlook is down 70 basis points from June, currently at 0.9%.
Ongoing decline in Germany's industrial sector is a drag on growth. (Editor's note: Germany is likely in recession right now.)
Eurozone manufacturing PMI has been signaling contraction for most of the year. In Asia, Chinese industrial production growth had a 10-year low in July.
[We] expect global trade volumes will contract this year on an annual basis for the first time since 2009.
We're also well underway in building our Ground's largest package handling capabilities to accommodate items like TVs, tires, and furniture. (Editor's note: This is adding costs and reducing profits and margins but should pay dividends down the road.)
We continue to expect to incur $350 million of TNT integration expenses in FY '20 and $1.7 billion in total through FY '21. (Editor's note: TNT was an acquisition in Europe from 2016, integration costs continue, but again, this will eventually be a positive catalyst.)
We're not expecting any additional weaknesses in the international macro environment from where we are today.
And finally, the big one, from CEO Fred Smith:
I have to tell you 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. So the serious trade disputes began in the spring of 2018, and they escalated throughout the summer of 2018. And 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 of they're not selling as much to China, which is a huge customer of Europe.
That's a lot — let's sort through it.
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Let's Sort Through It
There are some CAPEX items that are hurting the bottom line now but will eventually help. The investment to larger items like TVs, tires, and furniture is one. The planes are another. So is the continued integration of TNT in Europe.
There are some big macroeconomic calls, too, such as the degree to which China's slowdown is hurting the EU and Germany. FedEx does about a third of its revenue in Europe, so that's a big deal, and one that's likely affecting other companies, too.
The "whistling past the graveyard about the U.S. consumer" is the one that really caught my attention. As I tried to show early on in this article, it doesn't take a lot of change in the spending habits of an average American household to have a pretty big impact on GDP. $1,000 less in annual spending per American household is all it would take to push the economy into recession. Mr. Smith seems particularly aware of how precarious that is.
But all that said, there's one item from FedEx that should have set off alarm bells for you: FedEx dropped Amazon as a customer!
The big question is: Why would you do that?
As a "for instance," take a look at UPS. The stock has been doing just fine, like 1.5% from its highs. It should be impacted by the same issues as FedEx... except it didn't fire Amazon!
This raises even more questions, which, I'm afraid, I'm gonna have to get into on Wednesday because, true to my childhood form, I bit off more than I can chew today!
There's more to look at with some consumer retail stocks (like Costco)... and what is going on at the Fed!
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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