Ben Bernanke said that the recession is over, but what he thinks isn’t important. The more important arbiter of the business cycle, Federal Express, reported its earnings last week. Profits were down 53% from the year prior. Profits were expected to be down, but they did not fall as much as expected. That’s because FedEx is seeing improvement in its freight and ground-shipping divisions. That means that the economy seems to be turning around, because FedEx’s performance is a leading economic indicator.

People ship items because they have received orders for them. The freight business in particular represents shipments between suppliers and manufacturers and then between manufacturers and retailers. The primary measure of economic growth, gross domestic product, measures the total amount of goods and services in the economy at the consumer level. That avoids double-counting, but it also means that producer activity will show changes before the GDP does.  That’s why the FedEx news is so exciting. If manufacturers are starting to order materials, then they must be seeing demand. If so, the recession that officially began in December of 2007 may finally be ending.

FedEx’s financial results will be a measure of economic performance as the business cycle unwinds. Overnight shipping via a private carrier is a luxury. The United States Postal Service has cheaper rates; it costs just 44 cents to send a first-class letter from Maine to Guam, although it probably won’t arrive the next day.  An increase in spending on FedEx indicates not only an improvement in the economy, but also a willingness to spend more for better service.

The relationship between transportation and the economy is long and logical. The original Dow Jones averages were developed to sell newspapers and explain economic changes. Dow Jones & Co.’s first three indexes tracked transportation, utilities, and industrial companies. It continues to calculate all three, although only the Dow Jones Industrial Average is followed widely these days.  The underlying idea is that when the transportation companies started doing well, it was time to sell their stocks to buy industrial stocks. When the industrial companies got hot, it was time to sell them to buy safer stocks, namely utilities. When utilities were at their peak, it was time to sell them and buy industrial companies in anticipation of an economic turnaround.

These relationships made more sense decades ago when the nature of American business was very different. The Dow Jones Industrial Average now includes such non-industrial companies as Microsoft and McDonald’s, and that throws off the use of the Dow for business cycle prediction. Utilities are now competitive businesses that make as much money from trading power as from offering basic metered services. Transportation has a different role in a service economy than in an industrial one. FedEx, by the way, is in the Transportation Average, as it should be.

The stock market in general is a weak leading economic indicator. Some public companies are strong indicators, and not just FedEx. Most public companies will finish their third quarter at the end of September and then report their results in late October. Market prognosticators will be looking for evidence that business is picking up by looking at the results of companies that make parts, components, shipping materials, or office supplies. Then, everyone will wait like little kids in line for the bathroom to see what happens to holiday retail sales.

About the Author

Ann Logue

Ann Logue is a freelance writer and consulting analyst who is fascinated by business and technology. She has a particular interest in regulatory issues and corporate governance. She is the author of "Emerging Markets for Dummies" (Wiley 2011), “Socially Responsible Investing for Dummies” (Wiley 2009), “Day Trading for Dummies” (Wiley 2007), and “Hedge Funds for Dummies” (Wiley 2006), and has written for Barron’s, Institutional Investor, and Newsweek Japan, among other publications. As an editor and ghostwriter, she worked on a book published by the International Monetary Fund and another by a Wall Street currency strategiest. She is a lecturer in finance at the University of Illinois at Chicago. Her current career follows 12 years of experience as an investment analyst. She holds a B.A. from Northwestern University, an M.B.A. from the University of Chicago, and the Chartered Financial Analyst designation. How's that for deathly dull?

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