A few news reports might have led Foolish investors to scratch their heads with confusion recently. On the one hand, the U.S. trade deficit came in lower than expected in May -- indicating good global growth. On the other, it was reported that the managing director of the IMF, Christine Lagarde, was signaling a cut in the IMF's global growth forecasts. Although, the two events appear contradictory, there is actually an explanation, which sees a positive outcome for companies like United Parcel Service (NYSE:UPS), FedEx (NYSE:FDX), and Boeing (NYSE:BA).
U.S. trade deficit lower
The drop in the U.S. trade deficit to $44.4 billion in May, was somewhat lower than most economists had forecast, and turns out to be a good indication of U.S. growth for three reasons. First, exports grew to a record high -- suggesting that international growth will aid U.S. GDP growth in future quarters, as American companies export more. Second, nonpetroleum imports also hit a new high -- an indication that U.S. domestic demand has picked up. Third, the reason that the deficit fell, partly because net imports of oil fell, this is a good sign because it indicates that the U.S. is moving toward self sufficiency in energy production.
The following chart demonstrates the U.S. trade deficit, and the impact of falling net oil imports:
Moreover, a snap-back in U.S. growth is only to be expected following a weather-affected first quarter in North America. All told, the strength in export demand is a positive sign, and augers well for logistics and shipping companies like UPS and FedEx.
Global growth lower too, what about Boeing, FedEx, and UPS?
With that said, why was Lagarde making negative noises on global growth? In a Bloomberg article, Lagarde said that the "global economy is gathering speed, though the pace may be a bit less than we previously predicted because the growth potential is lower and investment."
This sort of commentary suggests a reduction in the IMF's global growth forecasts, so what does it all mean for Boeing, FedEx, and UPS?
The key point is that global trade is not the same thing as global growth. Although, the two things are usually highly correlated, there has been a decoupling effect in recent years. This can be represented by looking at figures for air passenger and cargo revenue since the recession.
The good news is that cargo revenue -- a proxy for global trade growth -- is forecast to increase in 2014, and UPS and FedEx are seeing it in their earnings, too. For example, FedEx's CFO, Alan Graf, said the following on FedEx conference call recently: "Our global trade growth is improving. It is still below historical norms. We do expect the pace of trade growth improvement to continue throughout calendar year '14 and into calendar year '15."
Similarly, UPS generated 5% revenue growth in its international revenue, with international export volume coming in 7.7% higher in the first quarter. UPS's management also noted that they were "encouraged by the positive business trends we're seeing especially in Europe."
Moreover, if global trade is improving, then demand for airplanes for transportation purposes (cargo and passenger) is also going to increase -- good news for Boeing. Indeed, FedEx recently outlined that it was increasing its capital expenditures to $4.2 billion in its financial year 2015 from $3.5 billion this year, as it plans to support its fleet modernization program.
The bottom line
All told, the evidence is that global trade is picking up, even if global growth forecasts are not. Moreover, the commentary from FedEx and UPS is indicating that demand from Europe is improving, while China is under pressure to increase its domestic demand. The decline in U.S. net oil imports is not bad news for Boeing, on the contrary, it could be indicating that oil prices are headed lower -- good news for air transport. Meanwhile, record U.S. exports and non-petroleum imports imply that cargo transportation is about to improve. All of which, should help logistics companies like FedEx and UPS, while companies exported to trends in transportation, like Boeing, will benefit too.