Lost in the shuffle of bad news yesterday was a tidbit of relatively positive news in the real economy. Regular readers know that I have been honed in on the real economy for the last few months while the mainstream media focuses on the health of bankers and bondholders. An elite group of leaders gathered at yesterday’s National Summit conference to discuss the state of the economy. Among them was UPS CEO Scott Davis. As the world’s largest parcel delivery service, UPS is in a unique position to gauge the strength of the economy. Mr. Davis confirmed what many have been saying: the worst is behind us, but the tough sledding is not necessarily over:
“I think the biggest declines are behind us and we should see a return to growth by the end of 2009. It will just take some time to work our way through this thing. As far out as I can see is next year and I’d expect to see growth, but I’d expect to see it below trend.”
Adding to that, Mr. Davis sees rising rates and gas prices (what I have been referring to as reflation in all the wrong places) as major hurdles:
“If mortgage rates climb too much it’s going to hurt housing, which obviously has an ancillary impact on other industries. We’re going to manage the company as if the company is going to stay where it is until we see differently. We need to see improvement in this economy before we change.”
This is a mixed view at best and is similar to what we’ve been hearing for months from various industry leaders, but it is interesting to hear this from a bellwether firm as opposed to bankers and government officials. I will be very interested to hear what FedEx says in the morning. My guess is they will tell similar stories of stabilization, but no recovery just yet.
Along the same lines was a nice follow-up to our post on scrap metals the other day. Reader “Billy” generously left us this note yesterday on the status of the scrap metals business:
I’m the general manager of —————– a small privately owned metals recycling center in ————-, –. We buy all types of scrap metals from individuals, scrap peddlers and businesses, sort them by grade if they’re not already sorted and sell to larger recyclers, brokers and steel mills depending on price and terms. We don’t trade on Comex but I do keep up with Comex daily as part of my efforts to predict what I’ll be paid for the metals I buy. Depending on how the metals are sold, smaller recyclers like us can expect to be paid 15% to 30% below the prices quoted on Comex.
Competition is friendly but fierce. Everyone knows each other and even my biggest competitor has been known to help me through the rough spots. Fortunately for our company we have a very coveted location that several big players in the industry would like to own so they’re all quite good to us. That said, with markets being what they are no one has big enough margins to do anyone any big favors. Last Spring the margin on scrap steel was 3-5 cents but last Fall we only managed 1 cent per pound. Now we’re back up to a 2 cent margin.
Prices are low so a lot of potential vendors are sitting on metals thinking last Spring’s prices will return but most of the old timers who do what I do say it will take ten years or more before last Summer’s prices return.
As one who earns his living buying and selling scrap metals I can only say it’s a scary time.
Many thanks to reader Billy for this inside look.
Update – Not what the bulls wanted to hear from FedEx. They reported a huge revenue miss and cut guidance. Specifically, they said:
“There are signs that the worst of the recession is behind us and we remain optimistic that we will see quarter-over-quarter economic improvement later this calendar year.
The operating environment for our first two quarters in fiscal 2010 is expected to be extremely difficult,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. “Manufacturing activity is expected to be substantially negative year over year through the summer and last year’s first quarter results benefited from stronger economic activity, making earnings comparisons difficult. Also, the recent run-up in fuel prices will have a significant negative impact on our first quarter’s results. At this time we do not have enough visibility into the economic recovery and jet fuel prices to provide a meaningful annual earnings forecast. However, we believe that FedEx will be poised for growth in our fiscal second half, as our many cost-saving initiatives gain traction and the economy begins to improve.”