FedEx’s profit setback could be a sign of economic slowdown

CNN
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FedEx said a weaker industrial economy led to a “challenging” quarter, prompting the company to lower its outlook for the rest of the year, a sign of a possible cooling in the broader economy.

The company, sometimes seen by investors as a beacon of the U.S. and global economy, has focused most of its concerns on industrial customers who ship goods to other companies, rather than consumers, who make up the vast majority of U.S. economic activity. In fact, Chief Executive Officer Rajesh Subramaniam said the company sees e-commerce shipments “starting to pick up again.”

But it’s industrial customers that are causing concern for FedEx and investors, sending FedEx (FDX) shares down 14% on Friday.

“The soft manufacturing economy is clearly weighing on (business-to-business) volumes and it was definitely much weaker than we expected, and we have to make adjustments,” Subramaniam told investors in a call Thursday after his late-day report. “And as you know, manufacturing shipments are our biggest gainers and our most profitable.”

The company said this led to “a reduction in demand for priority services (and) an increase in demand for deferred services.”

FedEx is a company created and built on the need for people to move packages quickly—after all, that’s the name. When people stop doing that in the interest of saving money, it’s bad news for the company.

FedEx has experienced “pretty drastic changes” in the mix of orders moving from priority to deferred, according to Chief Financial Officer John Dietrich on a conference call with investors, even though he said overall volumes “were pretty strong for the most part.”

The weaker-than-expected results came a day after the Federal Reserve delivered a bigger-than-expected half-percentage-point rate cut in a bid to boost U.S. economic activity. Subramaniam cited that cut in his notes to analysts.

“The magnitude of the Fed’s rate cuts yesterday signals a weakness in the current environment,” he said. “We don’t currently assume a significant return to the industrial environment for the remainder of this (calendar year).”

But Chairman Jerome Powell said Wednesday that the Fed was cutting interest rates to support the labor market. “The labor market is in strong shape, and our intention in today’s policy is to keep it that way,” Powell said. “You could say that about the economy as a whole: The U.S. economy is in strong shape. It’s growing at a strong pace. Inflation is coming down. The labor market is in strong shape. We want to keep it there. That’s what we’re doing.”

Subramaniam said FedEx is “cautiously optimistic” about a moderate recovery in industrial production in early 2025, “however, at this stage we are taking growth expectations quite low given the environment we are observing.”

FedEx also had to deal with rising costs, especially wages.

FedEx shares were up 21% year to date through Thursday’s close before falling on Friday.