Friday, May 27, 2011

Concensus Economic Forecasts Now Lower Than Those Available When Last USPS Public Forecast Made

Here is the latest list of announcement of slower economic growth announcements:

Goldman Sachs trimmed GDP growth to 2.6 percent for all of 2011 from 3.1 percent.

JP Morgan  cut GDP growth to 2.5 percent annual pace in the second quarter of 2011 from the previous estimate of 3 percent.  This followed a cut in full year growth to 2.5% from 2.6%.  The small decline in full year GDP growth reflects a shift in auto sales from the 2nd quarter to later in the year once supply disruptions caused by the Japanese Earthquake are resolved.

Macroeconomic Advisers has cut their GDP growth rate from 2.8% annual pace in the second quarter of 2011 from the previous estimate of  3.2%.

The slower growth forecasts were generally made before new data on housing sales and consumer spending were announced that indicated that neither housing nor retail sales are experiencing robust growth.  

Why does this matter for the Postal Service?

The decline in First Class mail, and in particular statements and bills, increases the Postal Service's reliance on economically sensitive advertising and parcel shipping.    So not only does the Postal Service face declines in revenue from the product that has traditionally generated most of its revenue, the revenue that remains becomes more sensitive to the business cycle.

 If revenue will increasingly rise and fall with the business cycle, so must costs.    Contracts with employees, transportation companies, and other contractors that assume a steady demand for services over an extended period of time need modifications that will allow the Postal Service to modify schedules as demand changes. 

The Postal Service made this change with the new APWU contract, and will seek similar changes in its other agreements. 

Similar changes are needed in its highway and air transportation contracts.   If contractors are not willing to provide service allowing for such flexibility, then the USPS may actually find it cheaper to use its own employees who can work a flexible schedule to handle certain movements.

Finally, the Postal Service needs to be able to look at its processing plant network as less of a fixed asset and more as a sunk asset.   The optimal network today will be different from the one needed five years and ten years down the road.  The Postal Service most likely already knows that only consolidating into existing facilities produces both sub-optimal cost-savings and sub-optimal service quality.   However, lack of capital prevents the Postal Service from creating an operating network that will fit the volume and mix and mail that a Postal Service focused on serving economically sensitive customers need.

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