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The macroeconomic thesis remains relatively simple in my opinion.  The USA and most of Europe are in balance sheet recessions.  This means that the private sector is likely to remain sluggish which will result in slow growth.  Thus far, deficit spending in the USA is allowing consumers to muddle through.  Austerity in Europe is depressing many of their economies.  Emerging markets are relatively healthy on the other hand and have served as a crutch for the rest of the world.  This has been particularly important for corporate profits where the combination of cost cuts, slow domestic growth and high international growth is creating healthy profits.

The major risks to the downside in this scenario are a worsening crisis in Europe, austerity in the USA and a slow-down in China.  Europe has kicked the can once again with their most recent bailout package.  This means Europe is going to remain weak as austerity takes hold.  The USA is not headed into full-blown austerity yet, but the end of the fiscal stimulus combined with the possibility of harsh budget cuts stemming from the debt ceiling debates should put downside pressure on the US economy in the coming year.  Still, with double digit deficits the private sector should be able to muddle through.  Emerging markets are the real key here and according to UPS and their latest earnings report the picture is becoming more precarious.

Below are some snippets from this morning’s conference call:

“The current forecast call for second half GDP growth of more than 3%. Given all the uncertainty that exists in the U.S. economy, it could end up being anywhere from 1.5% to 3.5%. Bottom line, economic growth expectations have slowed from where they were at the start of 2011. ”

…Despite slowing economic growth expectations, I’m encouraged by the progress we are making.”

…Now let’s turn to the International segment. Revenue was up more than 13% on strong volume growth of 6.2%. Export volumes increased over 8% with growth around the world. Europe and China continued their momentum of solid growth, although we did see slowing in the rest of Asia.”

…Given the softness in the U.S. economy, we expect third quarter volume growth to be slow and operating margins to be similar to last year. In the fourth quarter, we expect year-over-year operating margin expansion. In International, we expect second half operating profit growth of mid-to upper teens, compared to last year as the impact of our hedging programs is mostly behind us. The Supply Chain and Freight segment will continue to see the margin expansion and revenue growth, as we expect to experience operating profit growth in Freight and strong operating margins in Forwarding.

To wrap this up, as Scott indicated, economic conditions have slowed since we last provided guidance. A good example, U.S. GDP growth expectation for 2011 was at 3.1%. It was revised downward to 2.9% and now sits at 2.5%.”

So, for now, if UPS is our guide (and they’re a pretty good one), we can expect more of the sluggish growth that we’ve been seeing although the slow-down risk in Asia appears to be gaining some momentum.

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