FedEx's unfunded pension problem gives us a clear look at the troubles lurking just around the corner for those who borrowed their way through the recession.
Is the recession truly over?
It may seem somewhat late to be asking that question. After all, haven't Washington and Wall Street already bragged as to how we have had an adequate number of consecutive months of GDP growth to sound the death knell for "The Great Recession of 2007-2010"? Heck, we've even been regaled by the Federal Reserve itself as to how American's "wealth" has increased for four straight quarters now.
As usual, the actual answer to that question is somewhat more complex - and substantially more disturbing - than our little propaganda makers would have you think.
If you were to consult the folks at the National Bureau of Economic Research, considered by many to be the ultimate arbiter of business cycles, they would tell you that they are not yet satisfied that we are well and truly clear of the downturn that began in December of 2007.
Apparently, they wish to be quite sure that the double dip worried fellows like Professor Nouriel Roubini and our own Justice Litle have warned us of does not come to pass before they will sign off on these new "days of milk and honey." (If you are interested in reading what Justice has to say, sign up for his investment commentary.)
But that is not actually what I was referring to when I asked whether the recession was truly over.
What Happens When We All Act Like PIIGS?
What I am concerned about today is the fact that we have not actually solved the problems that brought us so low. Rather, we have attempted to forestall them by borrowing trillions of dollars against future productivity.
I'm sure you've already heard many, many arguments as to the theoretical overhang from our national debt, which is now rapidly approaching par with our annual GDP. (When these things happen in Europe, we make noises as to how those "irresponsible PIIGS" will bankrupt the European Union and break the euro. But when that happens here, we read that this is "how a robust economy does business.")
And I'm sure that you have had your ear bent till it is sore as to how unfunded and underfunded mandates like Social Security, healthcare and mortgage guaranties will destroy our children and grandchildren's potential prosperity. Please understand that I am not saying that these things aren't very serious threats.
Unfortunately, these are long-term problems with manifold variables, and so it seems that most any cogent argument about these issues breaks down when opposing sides can't even agree on a basic data set.
But today, I have a rock-solid example for you that demonstrates quite clearly what happens when you borrow from Peter to pay Paul.
A Sensitive Barometer
One of the companies I like to keep a close eye on is FedEx (FDX:NYSE), as it is a reasonably sensitive barometer of the economy in general. Unlike other transports, FedEx is relatively quick to confirm or deny other signals.
First off, there is FedEx's obvious ties to retail. The stores often claim that all is rosy for months at a time. But express shippers always know immediately when sales volume and urgency is off.
Beyond that, FedEx also carries for both business and industrial clientele. And unlike ships and rail, FedEx's services are not booked weeks or even months in advance.
Finally, FedEx is especially vulnerable to labor and energy costs. Because basically all they do is pay guys to drive fuel-sucking planes and trucks about.
When Good Companies End Up in Bad Places
Tot it all up, and I was quite willing to recommend this week that my WOW readers purchase puts against FDX. And what do you know? The very next morning, FDX warned that they would most probably come up short, profit-wise, come the next quarterly report.
But their particular reasons for this shortfall are well worth noting. It seems that all through the recession, FDX has been neglecting to fund such contractual obligations as their pension and health funds. And now they are behind the eight ball by more than a bit. This unfunded corporate mandate seems to have blindsided analysts, and now FedEx looks like it will miss their rosy estimates, possibly by as much as 13%.
Keep in mind that even those estimates were based (on company advice!) on a rising economy - and flat energy and labor costs. Problem is, either the economy isn't rising after all, like more than a few of the folks around here think. Or it is, and both fuel and labor costs will rise with it. It's awfully hard to have this sort of thing both ways, folks!
Two Ugly Questions
So what do we have here when you tot it all up? A series of unfunded obligations coming due in a teetering economy, just as borrowing and operating costs are threatening to rise.
Now I have two questions for you. The first is philosophical: "Can the recession truly be over if we are still paying through the nose for it?" The second is more practical: "Does anyone out there remember what finally tipped GM into bankruptcy?"
Yeah, that's right: a recession - and pensions.
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