UPS Says Customers Trying To Save By Shifting Away From Airmail

(Adds analyst comments, details on industry)

By Nivedita Bhattacharjee

July 12 (Reuters) - United Parcel Service Inc, the world's No. 1 package delivery company, on Friday forecast second-quarter profit below Wall Street expectations, signaling that the global economic recovery still has a ways to go.

UPS, an economic bellwether along with rival FedEx Corp because of the high volume of goods they move around the world, blamed a weak U.S. industrial economy, customers' trading down to slower but cheaper shipping services, and overcapacity in the global air freight market.

The earnings warning sent UPS shares down more than 5 percent in midday trading, while FedEx fell 2.4 percent.

Globally, manufacturers are dealing with a number of headwinds, including a weak economic recovery in the United States, slowing growth in China and recession in Europe. The Institute for Supply Management's monthly survey of global purchasing managers, a gauge of economic activity, has been essentially flat for seven months, suggesting companies are not aggressively restocking their inventories.

Last month, Terex Corp, a top maker of construction and mining equipment, slashed its full-year earnings forecast, citing deceleration in the economic recovery in North America and continued weakness in Europe.

"A lot of companies are being smarter about managing their supply chain and deferring their shipping wherever they can to save money," said analyst Joshua Herrity of New York-based Telsey Advisory Group.

Analyst Helane Becker of Cowen & Co said many UPS customers have been focused on cost-cutting. "We do not expect to see a significant uptick in next-day priority services until we see a global recovery, and not just a U.S. recovery," she said.

Still, UPS's large ground shipment network in North America puts it in a better position than FedEx, which focuses more on international air shipments.

FedEx said in June it was raising shipping rates and cutting jobs and costs as excess capacity in the air freight market had more than offset increased shipments.

UPS said on Friday it expected second-quarter earnings of $1.13 per share. Analysts on average expected $1.20, according to Thomson Reuters I/B/E/S.

UPS cut its full-year earnings forecast to $4.65-$4.85 per share from $4.80-$5.06.

The company said package volume growth had also been hurt by labor issues. Last month it said its Teamsters union workers had approved a five-year contract covering about 235,000 employees, but contracts for freight workers and 17 local supplemental contracts had not been settled.

Morningstar analyst Keith Schoonmaker said the risk of a strike had passed and that the company still had advantages over its rivals.

"Slightly lower growth this year does not move the needle significantly on our fair-value estimate," he said.

UPS is scheduled to report second-quarter results on July 23. (Additional reporting by James Kelleher in Chicago and Sagarika Jaisinghani in Bangalore; Editing by John Wallace)