UPS has delivered a stark warning to the White House and Congress that U.S. economic growth will fall to an anemic annual rate of 1 percent by Election Day.
The company’s leaders on Tuesday said U.S. businesses are in danger of going over the fiscal cliff because of Washington’s inability to get anything done.
The packaging company is often seen as a useful barometer for the broader business community. If business is bustling at UPS and the company’s brown-uniformed drivers are hustling around the country and world to deliver packages, it is a sign of the economy’s strength.
Conversely, if business is slow at UPS, policymakers should pay attention, especially in an election year.
On Tuesday, UPS reduced its forecast for 2012, saying it expected GDP growth to be 1 percent in the second half of the year. Critically, it reported no growth in its business-to-business income in the second quarter; 60 percent of the company’s business comes from companies sending each other packages.
UPS Chairman and CEO Scott Davis gave a particularly gloomy reckoning of the U.S. business climate.
He said UPS’s customers are increasingly nervous and uncertain because of the elections and the looming “fiscal cliff” of tax hikes and spending cuts set to begin on Jan. 1, 2013. Without action by Congress, all of the George W. Bush-era tax rates will rise in January, and $1.1 trillion in budget cuts to defense and non-defense discretionary spending will be implemented.
Davis said uncertainty is constraining the ability of businesses to hire new employees, make capital investments and restock inventories.
“As we get closer to the fiscal cliff, there’s just more uncertainty out there than ever, and it’s hard for me to see how that’s going to turn around until we get some policymaking done in Washington,” Davis said during a conference call with analysts.
“Customers are concerned. They’re not going to invest. They’re not going to hire people. They’re not going to stock inventory with all that uncertainty,” he said.
UPS was punished by markets as the Dow Jones endured another day of triple-digit losses. UPS ended the day down 5.2 percent after its second-quarter earnings and revenues missed forecasts.
President Obama in recent months has blamed the slow U.S. economic recovery on Europe, and it has surely had a big effect. Wall Street was in a panic Monday over the state of the Spanish economy, and the European debt crisis has no end in sight.
But UPS’s business grew in Europe in the second quarter, and the company is much more worried about the state of the U.S. economy.
Norman Black, a spokesman for the company, said in an interview that UPS’s leaders have been very clear that their concerns about the business climate are not about Europe. They are about the United States.
“Nobody thought we’d be looking at a situation where Congress was just not addressing these issues,” he said.
Inside the Beltway, there was cynicism about Congress’s agenda this year. Very few people thought Congress would be able to get a deal done to extend tax rates. And it looks like those insiders are going to be right with their predictions.
Outside the Beltway, there were hopes something could be done at the beginning of the year. Now that has changed, according to Black.
“This is something that’s changed in the last three months. Our customers are increasingly concerned that they’re going to fall off a fiscal cliff – and no one cares.”
The government for the last several years has operated on a series of stops and starts, with Congress and the White House approving tax policies and spending bills on a relatively short-term basis.
Businesses don’t work like that, Davis argued on the call.
“We have a three-, four-, five-year horizon. People cannot make decisions without that. So I think it’s going to get tougher before it gets better.”
When will the economy improve? Perhaps not until Congress deals with the fiscal cliff – and in a meaningful way that provides some certainty to the business community for years, not months.
Davis noted that former World Bank chief Robert Zoellick said recently the nation is “one debt-ceiling deal away from getting this economy going again.”
“But we’ve got to get that done,” Davis said.
Source: THE HILL