Package delivery giant and U.S. economic bellwether FedEx Corp said the next two quarters will be extremely difficult as the recession and higher fuel prices bite into its bottom line, but said the pace of economic decline appears to be slowing.

There are signs that the worst of the recession is behind us, Chief Executive Fred Smith said in a statement, and we remain optimistic that we will see quarter-over-quarter economic improvement later this calendar year.

The package delivery company reported a larger quarterly loss on Wednesday and gave an outlook well below Wall Street estimates for the current period, sending its shares down 2 percent.

FedEx forecast earnings per share of 30 cents to 45 cents for the current quarter. Analysts were expecting 70 cents.

The company said its loss had widened to $876 million, or $2.82 a share, in its fiscal fourth quarter ended May 31 from $241 million, or 78 cents a share, a year earlier.

Excluding previously announced charges of $1.2 billion from two units, the company reported a profit of 64 cents a share.

Wall Street analysts on average had expected 51 cents per share on that basis, according to Reuters Estimates.

The charges stem from a decline in the fair value of home office supply chain Kinko's Inc, which FedEx bought in 2004 and is now called FedEx Office, and Watkins Motor Lines, a trucking company acquired in 2006 and now known as FedEx National LTL. Both units have been hit by the recession.

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Like its main rival, United Parcel Service Inc , Memphis, Tennessee-based FedEx is considered a bellwether of U.S. economic activity.

As the U.S. recession has dragged on, package volumes at both companies have suffered.

FedEx said stringent cost-cutting had mitigated the impact of the recession on its results.

But UBS analyst Rick Paterson said cost control will only take FedEx so far with stagnant pricing, limited remaining productivity opportunities and market share initiatives unable to materially offset the brutal business cycle.

While cost control came in stronger than expected, Patterson wrote in a note for clients, the fact remains FedEx has more operating leverage than the vast majority of freight companies, so (there is) nowhere to hide in the current perfect economic storm.

FedEx reported quarterly revenue of $7.85 billion, down more than 20 percent from $9.87 billion a year earlier.

At this time we do not have enough visibility into the economic recovery and jet fuel prices to provide a meaningful annual earnings forecast, said Chief Financial Officer Alan Graf. However, we believe that FedEx will be poised for growth in our fiscal second half, as our many cost-saving initiatives gain traction and the economy begins to improve.

When fuel prices go up, the extra expense hits FedEx's results in the short term. The company charges customers a fuel surcharge, which lags real-time prices by up to two months, so in the medium term it recoups those costs.

Graf said on a conference call with analysts that the company expected the U.S. economy to return to growth in the first quarter of calendar year 2010.

While there was little to embrace as good news from the (FedEx) conference call, our sense is that much of the cautious commentary was probably already expected, JP Morgan analyst Thomas Wadewitz wrote in a note for clients, and we believe the response of the stock is likely to be muted.

In noon trading on the New York Stock Exchange, FedEx shares were down 2 percent at $50.41.

(Reporting by Nick Carey; Editing by Brian Moss, Lisa Von Ahn, Tim Dobbyn)

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