Are the Postal Service's Earnings Forecast Too Optimistic?

Readers that are expecting an answer to the question in the title will be disappointed.   The truth is I do not know.   However, I do know that the most recent forecasts, or at least those contained in the exigent rate case are woefully out of date even though they are at worst 6 months old.

The problem with the financial projections does not lie with the Postal Service or those that are responsible for their development.   At the time the forecast, they represented the best understanding as to the near term (under 2 year) prospects for Postal Service revenues and costs given the economic data and management plans at the time they were made.   The problem exists because 1) the regulatory lag associated with preparing and litigating any proceeding before the Postal Rate Commission; 2) the lack of shareholders and investment analysts that are developing independent forecasts that force enterprises to announce how changing economic conditions affect future earnings at least quarterly and in the cases of many companies monthly; and 3) the risk that the Postal Service faces that the time frame for litigating proceedings before the Commission could lengthen if it would regularly suggest that the numbers that it presented were better or worse than they now are.

Now why would I be concerned that finances may be too optimistic?

The primary reason is that the general understanding of economic growth is worse today than it was 6 months ago.  Why?

1. The consumer has become significantly more risk adverse than ever seen before.   This affects the economy in a number of ways.   Consumers are investing their savings in the most secure investments possible (e.g. CD's and Treasury Bonds) and no longer see either real estate (i.e. their home) or stocks as reasonable ways to save for retirement or children's college tuition.  Consumers are stopped borrowing as they realize that the cost of loans now is greater than the change in the value of the goods they plan to purchase, whether that is a major appliance, car, or home.   If one believes that prices are not going to rise, it may be cheaper to save rather than borrow.   That explains why lay-a-way programs are starting to make a comeback.   Finally,  consumers are changing views on what they believe are necessities.  Whether this reflects the state of the economy or changing demographics does not matter.   Items such as electric dryers, microwave ovens, and air conditioners are considered to be necessities by fewer consumers tan prior to the recession with the shift occurring before the recession began.
   
2. Companies focused on selling everything from appliances to shoes to consumers realize that their projections for consumer spending during the back-to-school and Christmas seasons were overly optimistic.   To the extent that these companies can, they are scaling back purchases to get their inventory more closely aligned with consumer demand.   Companies selling to consumers realize that managing overhead, selling, and inventory costs are critical if they are going to meet profit goals.  Those that were late to this realization will likely force higher levels of promotions during the upcoming selling seasons pressuring corporate profits.
   
3. The way we use computers, telecommunications, and energy have shifted both businesses and consumers toward technologies that require less labor to produce and maintain.  In addition, service and manufacturing companies have used these changes to reduce the use of labor intensive processes that take advantage these technologies.  The shift has resulted in the double digit unemployment among blue-collar workers which may not improve in the lifetime of the employees affected.

The slowdown in the economy should affect mail volume and revenue as much of the Postal Service's business is economically sensitive.  However, not all is bad news. 

• The Postal Service is likely to have a good 1st quarter in FY 2011 as political and retail advertising max out available broadcast advertising capacity and look to mail as the only advertising media that has the capacity to reach voters or customers. The increase in demand may have a negative impact on costs as the bump in volume may result in a bump in overtime to deal with peak volumes in October, 2010.  Also, this is a one time bump in revenue and volume and should not be mistaken for a longer term trend as the volume gained this fall will not come back again until the 2012 election.
  
• Costs for energy and labor will likely not rise much.   Lower energy prices will hold down transportation and facility costs.  Depending on the energy price assumptions used in the forecast, costs may be lower than now projected.

Given these trends it is clear that forecasting the Postal Service's finances need a second look.  In addition, it would seem that if the Postal Service wants to make any major effort to reduce its overhead and capacity, it may make sense to begin planning for changes that will begin after the January 1, 2011.   Once the election and shopping seasons are over, demand will be back down to normal seasonal levels reflecting only the general state of the economy and the technological shifts away from mail.