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UPS Sheds Leading Indicator Status

Ted Reed

The stock market may view UPS(UPS Quote) as a leading economic indicator, but that's not the way the world's largest package delivery company sees itself.

Twice during last month's earnings call, CFO Scott Davis asserted, "We're not a leading indicator," as analysts questioned the relationship between the economy and UPS' lower-than-expected growth projections.

In fact, UPS has been saying for several years that its relationship to the economy has changed as "inventory has been stripped out of commerce," says spokesman Ken Sternad. It's just that not everybody is listening.

"Years ago, the way inventory was ordered and manufacturing was done, there was several months of lead time," Sternad says. "We could see industrial production kicking up to restock inventory in anticipation of upticks in the economy. So we could get a view at least several months in advance of economic activity that was an economic indicator."

But the world has changed. Now, UPS's signature customers include Li & Fung, a Hong Kong-based shirt maker that gets raw materials from throughout Asia, then assembles them and ships the shirts in about a week.

"It's just an example of how tight the supply chain, how compressed it is," Sternad says. "As we talk, 6% of the U.S. GDP and 2% of the world's GDP is in our system. That's a lot of inventory that used to be sitting on the shelves months in advance of the sales cycle."

'Concurrent Indicators'

For its part, UPS rival FedEx(FDX Quote) isn't quite ready to abdicate its identity as an economic indicator.

"FedEx is a strong indicator of the economy," says FedEx spokesman Howard Clabo. "Whether economists choose to view FedEx as a leading indicator is up to them.

"Our broad transportation portfolio that cuts across virtually every sector of the economy, especially high-tech and high-value goods and services; our central role in facilitating e-commerce; our global reach and our fast cycle practice make us a solid indicator of the overall economy," Clabo says.

UPS and FedEx ought to be called "concurrent indicators," says Brian Clancy, managing director of MergGlobal, an Arlington, Va., transportation consulting firm.

"The closer you are to final consumption, the more likely it is that you are a concurrent indicator," he says. "The leading indicators are further up in the supply chain, moving stuff between factories or from factories to distribution centers."

True Indicators

Clancy says he has always wondered at the conventional wisdom about the overnight shippers as leading indicators. "I don't know who came up with that," he says. "It is conceptually incorrect, and has been for the last 15 years."

Because the small-package focus of the overnight shippers almost assures that their business is weighted toward just-in-time deliveries, the true leading indicators include trucking companies, railroads and inbound container flows from Asia, which "give you a three-to-six-month window on how everyone is viewing the economy," Clancy says.

Railroads in particular are commonly seen as leading indicators, and weekly rail traffic volumes are closely followed. "A number of things moved by railroads will subsequently be processed or resold," says spokesman Pat Hiatte of Burlington Northern Santa Fe(BNI Quote).

In the fourth quarter, for instance, Burlington Northern's international shipments of containers and intermodal units rose 5.3%, while overall volume rose 3.7%, providing an apparent indication that consumer demand remains strong.

The shipments generally involve Asian-manufactured consumer goods, such as electronics and apparel, which move from West Coast ports to retail distribution centers. From distribution centers, the goods are moved either to store shelves or directly to consumers via FedEx or UPS.

Meanwhile, Union Pacific(UNP Quote) "absolutely considers itself to be a leading indicator," says spokeswoman Kathryn Blackwell.

The railroad hauls a broad variety of products that are shipped well in advance of the time they are consumed, she says. Included are more automobiles, both domestic and imported, than any other railroad; lumber and other building products; and large quantities of chemicals for manufacturing production.