Paychex-FedEx Offer Barometer For Second-Quarter Growth

Data from the two companies are “like a weather vane” of U.S. health for investors such as Lawrence Creatura at Federated Investors Inc. (FII) Paychex’s checks per payroll can help track changes in employment, while FedEx’s U.S. shipment volume indicates “the velocity of industrial production,” he said.

These are “thermometers that some investors use to measure the temperature of the economy,” because they track government statistics for jobs and manufacturing output, said Creatura, who helps to oversee $363.6 billion as a fund manager in Rochester, New York.

FedEx, operator of the world’s biggest cargo airline, is scheduled to report fiscal fourth-quarter earnings on June 19, followed by Paychex, a payroll-service provider, on June 27. The Commerce Department will announce its advance estimate for second-quarter gross domestic product on July 27. The economy probably expanded at a 2.1 percent annualized rate in the period, according to the median estimate of 68 economists surveyed by Bloomberg News from June 1 to June 5.

‘Best Indicator’

The average number of checks Paychex issues per client is “certainly our best indicator of how the economy is doing,” Martin Mucci, president and chief executive officer of the Rochester, New York-based company, said in an interview. This proxy for small-business hiring grew 1.8 percent in both the fiscal second and third quarters, compared with a 5 percent decline in the three months through Aug. 31, 2009, as the 18- month recession was ending.

Stocks climbed as speculation the Federal Reserve will take steps to stimulate the economy tempered concern about a worsening European debt crisis. The Standard & Poor’s 500 Index rose 0.3 percent to 1,312.69 at 9:50 a.m. in New York.

Elsewhere today, a report showed manufacturing production in the U.K. fell more than economists forecast in April, pointing to continued economic weakness at the start of the second quarter. In Asia, the International Monetary Fund said Japan’s currency was overvalued and the nation’s central bank should consider further monetary stimulus.

‘Flatten Out’

The recent gains in Paychex’s U.S. gauge were driven primarily by existing customers adding workers, Mucci said. The company would have anticipated growth to “flatten out” at this stage in an economic expansion because it would be adding more new customers, but such increases have been modest, he said.

Paychex forecasts growth among its current clients — which employ an average of 16 or 17 workers — will be “basically flat” this year, Mucci said. The company doesn’t provide a forecast for checks per payroll.

The metric probably will moderate closer to 1 percent during 2012 if new-business formation improves, said Timothy McHugh, an analyst in Chicago at William Blair & Co. This would be consistent with a “more normal hiring environment,” while no growth would signal a slowing in the pace at which small businesses increase headcount, said McHugh, who maintains an “outperform” recommendation on the company.

Hiring by all nonfarm employers stalled in May at 69,000 workers, the least in a year, while the jobless rate rose to 8.2 percent from 8.1 percent the previous month, Labor Department data show.

Daily Volume

Investors also look to FedEx to gauge the pace of expansion in the world’s largest economy, said Charles Clowdis, managing director of transportation-advisory services at IHS Global Insight in Lexington, Massachusetts. That’s because the Memphis, Tennessee-based company’s average daily volume for its U.S. domestic-package, Ground and SmartPost businesses tracks production activity in the U.S., he said.

Total volume in these businesses rose 3.4 percent in the three months ended Feb. 29 compared with a year earlier, down from 10.4 percent in the fiscal quarter ended Nov. 30, 2009, according to FedEx data. Manufacturing output, which accounts for about 75 percent of industrial production, grew 5.8 percent in April compared with a year earlier on a seasonally-adjusted basis, down from 8.1 percent in June 2010, Fed data show.

FedEx’s “depressed volumes” were partly the result of “below-trend” economic activity, Mike Glenn, executive vice president for market development, said on a March 22 conference call. “We just don’t have as strong” an economy “as we had hoped it would be a year ago,” Chief Financial Officer Alan Graf said on the same call.

‘Right Direction’

Even so, the FedEx data indicate growth is “moving in the right direction, albeit very slowly,” which is consistent with a “moderate recovery,” Clowdis said. If volume gains fall below 2 percent for the quarter ending May 31, this would be “more concerning,” he said.

FedEx declined to comment, noting it is in a quiet period before its earnings release.

As investors try to gauge the economy’s strength, these data are important to watch in concert with other employment and production statistics, according to Creatura.

“Investors are constantly on the hunt for new and differentiated sources of information that the rest of the market doesn’t have,” he said.

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