An employee sorts packages before loading them onto delivery trucks at the FedEx Express Station in New York.Mark Lennihan
As economists grow more skeptical about the U.S. economic recovery, a number of corporate executives are sounding more upbeat these days, making the two groups look at odds with one another. Who's right?
On Monday, FedEx Corp. became the latest company to express optimism after it raised its guidance for the current fiscal quarter and full year.
"Our revenue and earnings growth are exceeding original expectations," said Alan Graf, FedEx's chief financial officer, in a statement that sent the share price surging 5.6 per cent and also helped lift major indexes.
He attributed the forecast boost, in part, to FedEx's superior execution. But wait a minute: Rival United Parcel Service Inc. also raised its full-year earnings forecast last week, suggesting that there is more going on here than reliable, courteous service.
As global shippers of anything you can put into a box or envelope, these are bellwether stocks that reflect economic activity in general, and consumer spending in particular. Their raised guidance suggests that the fretting over the possibility of slowing economic growth, stubbornly high unemployment and the rising risks of a double-dip recession look offside.
The shippers aren't alone in their optimism. General Electric Co. raised its dividend last week, citing strong cash generation and surprising observers with the timing. And closer to home, Canadian National Railway Co. raised its earnings expectations for the second half of the year - again, partly due to what it sees as a continuing economic recovery.
Paul Hickey, co-founder of Bespoke Investment Group, has been looking at the number of so-called triple plays this earnings season, counting the number of U.S. companies that have beaten earnings and revenue expectations and raised their forecasts. So far, 10 per cent of the companies within the S&P 500 have qualified, up from 7 per cent in the first quarter reporting season. Put another way, the number of triple plays has risen 43 per cent.
This strikes a contrast with what a number of high-placed economists have been saying about the economic recovery recently. No less an authority than Ben Bernanke, chairman of the U.S. Federal Reserve, cautioned in official testimony last week that the economic outlook "remains unusually uncertain."
Jan Hatzius, chief economist at Goldman Sachs, sees a slowdown in the second half of the year, with U.S. gross domestic product growing by less than 2 per cent at an annualized rate, along with an unemployment rate hovering just below 10 per cent through to the end of 2011 - both ugly statistics.
And if you really want to see what gloomy looks like, read anything Paul Krugman has written lately. The New York Times columnist and economics professor at Princeton University believes that the global economy is in the early stages of depression, with demands for government budget cutbacks arriving at a time when long-term unemployment is catastrophically high.
These views don't sound like the ideal backdrop to better earnings. "There's a disparity: Who do you turn to, the economists or the companies?" Mr. Hickey said. "That's the ultimate choice for investors."
He thinks that investors should put more emphasis on what companies are saying, given that executives are better suited than economists to looking at future trends.
But that's not to say that chief executives are consistently prescient. Tobias Levkovich, chief U.S. equity strategist at Citigroup, pointed out that chief executives were also confident about earnings in early 2000 and 2008 - key turning points in the economy when profits were about to vanish.
"When CEOs are wildly confident or desperately afraid, these are probably very good signals to go the other way," he said. "Human beings have a tendency to extrapolate, so when stocks are riding high and everybody is bullish, they feel really confident. And when stocks are collapsing, they get aggressively despondent."
The problem, Mr. Levkovich added, is that chief executives don't reside in the corporate trenches and often fail to see the shifts in business activity that might suggest trouble ahead.
Of course, the same can be said of economists, who are notoriously bad at predicting important shifts in the economy. As well, chief executives aren't table-pounding bulls right now. In the case of FedEx, its revised forecast still leaves its quarterly earnings below what were seen as far back as 2005 and well below the peaks in 2007.
"You have to look at where these things are coming from," said Carl Weinberg, chief economist at High Frequency Economics. "If a company raises its forecast by 20 per cent but they are still running at only half of where they were three years ago, then conditions still aren't good. They're just better."
Still, for many investors, "better" is a sweet word.