UPS

(UPS) - Get Report

says the economy is bad and getting worse, at least during the current quarter.

"We're going to presume the economy keeps getting worse," said CEO Scott Davis, on an earnings conference call. "Frankly, I think you will see the biggest drop in the first quarter of '09. The second quarter will be negative, but not quite as bad."

CFO Kurt Kuehn said conditions worsened from October to November, then stabilized during the pre-Christmas season when volume was close to flat. But in the first quarter, he said, "we do think trends will turn back closer to October and November than (to) what we had in December."

Once viewed as a leading indicator, UPS has become a proxy for the economy in real time, with 6% of the U.S. GDP and 2% of the world's GDP in its system at any given moment.

As for bright spots, UPS has a viable business, $1 billion in cash, strong cash flow, reduced fuel surcharges, plans to reduce costs and a potential benefit from the shutdown of DHL's domestic operation. It will continue to buy back shares this year, albeit at a slower pace, and will look for acquisitions at distressed prices.

Also, so far, the company has seen little of the benefits from efforts to consolidate operating districts, reduce flights, eliminate some package-handling operations, freeze management salaries and suspend its 401(k) match.

"The first quarter will be weak with slight improvements later in the year as initiatives take hold," Kuehn said. UPS shares traded Tuesday morning at $45.45, up $3.03 or about 7%.

Because of limited visibility, the company offered guidance for the first quarter only, forecasting per-share earnings of 52 cents to 68 cents. Analysts had estimated 65 cents.

In the fourth quarter, excluding items, UPS earned $829 million, or 83 cents a share. Analysts surveyed by Thomson Reuters had estimated 85 cents. A year earlier, UPS earned $1.13 billion, or $1.07 a share. Revenue was $12.7 billion, down 5%, and short of the estimated $13.2 billion.

UPS earned 25 cents a share including items, principally a $575 million noncash impairment charge related to the decline in value of its freight business.

During the quarter, average daily package volume was 17.7 million units, down 3.7%. A decline in fuel costs "was more than offset by the effects of economic deceleration around the world," UPS said. Domestically, volume fell 4.4%, and growth in revenue per item was constrained by a lower average weight per package and a continuing shift from premium products.

Internationally, export volume increased 1.6%, but revenue and revenue per piece fell 8%, primarily due to a shift away from premium products, general economic conditions and a stronger dollar.

Meanwhile, operating margin in the supply chain and freight division fell by 23.9%, revenue dropped 6.5%, and the adjusted profit margin slid 35%, largely reflecting declines in less-than-truckload hauling.

Competitor

FedEx

, in its quarter ending Nov. 30, reported net income increased 3%, largely due to lower fuel prices. But the package-shipper offered an exceedingly glum near-term outlook. For the current quarter, which ends Feb. 28, analysts expect earnings to decline by 52%, and revenue by 7%.