UPS (UPS): The Power Of Productivity

The market took the UPS (UPS) news hard. High fuel prices and slowing customer demand made the company cut its earnings forecasts, just as rival Fedex (FDX) did a week ago. According to MarketWatch: UPS "warning that second-quarter profit is foreseen coming in at 83 cents to 88 cents a share. It previously expected earnings of 97 cents to $1.04 a share."

There has been a scintilla of hope that UPS might offset gas prices with strong international sales, but there was nothing to it.

What should be viewed as a surprise is that UPS is making money at all. Shares in the cargo company are not doing any worse than they were at the beginning of the year, which does not make sense, save one piece of data.

In May, the Bureau of Labor Statistics reported that it was revising productivity numbers up for Q1. At non-financial companies productivity rose 4.6 percent in the first quarter as output rose 3.2 percent and employee-hours declined 1.4 percent.

Productivity cannot out-run inflation, but it can give rising prices a good race. And, that may be the saving grace for the US economy. If, and the "if" may be a long shot, inflation can be brought into check, and If oil and commodities prices moderate, there is a chance that productivity can help earnings begin to improve.

The secret strength of American business now is that it is better than almost any country in the world at getting more goods and services from fewer hours of work. Late last year, according to The New York Times, the International Labor Organization said "American workers are the world’s most productive, followed by the Irish." The Irish part can’t be true, but the statistics about the US are spot on.

UPS and a lot of US-based companies will report positive earnings this year, even in the face of the inflation of some of their core costs of goods and services. The man in the street still works hard, but he produces more every hour.

Forget the Irish.

Douglas A. McIntyre