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UPS Underscores Economy's Woes

UPS (UPS - Get Report) offered a sobering economic outlook on Thursday, saying the current quarter will likely be even worse than the first and the recovery will not begin until 2010.

The biggest package shipper, which saw its first-quarter profit drop 43%, is an important economic indicator because, at any given moment, it has 6% of the U.S. GDP and 2% of the world's GDP in its system.

Based largely on economic data and Easter's move from March to April, UPS said it anticipates current quarter earnings of 45 cents to 55 cents a share. Analysts had been estimating 65 cents. UPS shares were 4% lower at midday, when they traded at $52.45 a share.

"Hopefully we'll hit bottom later this year and begin seeing growth at the end of this year or early next year in the U.S.," said CEO Scott Davis, during an earnings conference call. He said Asia would likely recover at the same pace, but Europe "most likely will lag the rest of the world in the pace of its recovery."

For UPS, declining economic trends mean lower package volumes and lower package rates. "Industrial production numbers were horrible in the first quarter," Davis said. "Whenever (they) decrease, it challenges the weight of our packages, which does put pressure on us." During the quarter, average domestic package weights fell by 8%.

On the positive side, UPS -- like competitor FedEx (FDX - Get Report) -- says it is gaining market share due to the decision by DHL to largely cease its U.S. operations. UPS "captured a little more than half of [its] revenue with the remainder split up" among competitors, said CFO Kurt Kuehn. DHL customers' tendency to ship lighter packages was a factor in declining UPS average weight.
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