On Thursday, FedEx shocked investors by missing quarterly expectations across the board and issuing more cautious guidance, blaming a pullback by manufacturing customers no longer willing to pay top dollar for priority shipping. 

Shares in the company are set to open well over 10% down when trading begins on Friday, wiping out nine straight days of gains. If current indications prove accurate, FedEx stock could drop to levels not seen since late June when it positively surprised markets with its fourth quarter results.

“The soft industrial economy is clearly weighing on the [business-to-business] volumes. And it was definitely much weaker than we expected,” FedEx CEO Raj Subramaniam told analysts during an investor call.

FedEx is often seen as an economic bellwether. Its business cycles serve as an indicator of aggregate demand. Its downbeat assessment comes just as the online commerce sector begins preparations for the seasonal peak in parcel shipping ahead of December holidays.

After missing expectations for the fiscal first quarter that ended on August 31, FedEx warned both full-year revenue growth and adjusted earnings would come in at the lower end of its forecast range, with the latter topping out at $21 a share instead of $22 previously.

“This was a challenging quarter: customers globally were opting for cheaper deferred shipping, which hurt demand for priority services,” investment bank Bernstein admitted, reaffirming its outperform rating. This shift hurts since shipments linked to industrial production are the most profitable, according to FedEx.

Bernstein nonetheless urged clients to view any weakness as an opportunity to add to their position, expecting the market to eventually reward its progress cutting costs.

U.S. manufacturing sector contracted for 2nd straight month

For months economists have debated whether the Fed would end up making the same mistake it did after the pandemic—only instead of waiting too long to hike rates amid signs inflation was heating up, this time it would take too long to lower them.

On Wednesday, Fed chair Jay Powell cut rates for the first time since the COVID pandemic spread to the U.S. in March 2020. In addition to this week’s half-point cut, the policy-setting FOMC committee predicts a total 1.5 percentage point worth of further easing by the end of next year. 

That would bring overnight borrowing costs down to roughly 3.5%. Even then, however, monetary policy would still be slightly restrictive assuming the annual inflation rate remains around the 2.5% level last reported.

With real rates still significantly positive, capital-intensive manufacturers who must continually invest in property, plants and equipment are cutting back elsewhere.

“Now we’re not assuming a significant comeback on the industrial environment in the rest of this calendar year,” Subramaniam told analysts. “The magnitude of the Fed rate cuts yesterday signals the weakness of the current environment.” 

The FedEx boss cited as an example the recent reading from the U.S. manufacturing purchasing managers (PMI) index, which hit a low not seen since December and signalled a contraction in the sector for the second straight month.

At the time, S&P Global Market Intelligence chief business economist Chris Williamson warned the outlook for the industrial sector was grim indeed. 

“The combination of falling orders and rising inventory sends the gloomiest forward-indication of production trends seen for one-and-a-half year, and one of the most worrying signals witnessed since the global financial crisis,” he wrote.