Package delivery company FedEx Corp cut its earnings forecast for the current quarter on Friday, citing higher fuel prices and weaker demand for ground shipments too small to fill a truck.

FedEx shares fell as much as 5 percent, touching their lowest level since early 2006.

Both FedEx and its main rival United Parcel Service Inc, which is the world's largest package-delivery company, said recently they would hike delivery charges by 4.9 percent next year, but both also said they would cut fuel surcharges.

Investors watch the two companies as indicators of U.S. economic activity, the logic being that in a growing economy, more packages will be shipped.

I guess in this environment it wouldn't be a surprise, said Allan Meyers, a principal at AMBS Investment Counsel in Grand Rapids, Michigan, commenting on the lower FedEx forecast.

You've got rising oil prices, and shipments, I'm sure, are going to be slowing down, he said. It's just a gradual, continued slowdown in the U.S. economy.

Meyers co-manages the AHA Diversified Equity Fund and holds FedEx shares.

FedEx said it now expects a profit of $1.45 to $1.55 per share for its fiscal second quarter ending November 30, down from its previous forecast of $1.60 to $1.75.

Analysts, on average, had expected $1.70 per share, according to Reuters Estimates.

The significant increase in oil prices is having a toll on (FedEx's) express margins, as the fuel surcharge recovery mechanism lags about six weeks, wrote John Kartsonas, an analyst at Citigroup Global Markets, in a note to clients. He rates the shares a hold.

FUEL COST UP MORE THAN 8 PERCENT

Since we provided earnings guidance for the second quarter in September, our fuel costs have increased more than 8 percent, or $85 million, Alan Graf, executive vice president and chief financial officer, said in a statement.

Less-than-truckload freight trends in the FedEx Freight segment remain weak, despite economic signs that the decline in U.S. industrial production has hit bottom, Graf added.

Less-than-truckload carriers consolidate smaller loads in a single truck. Like the rest of the U.S. trucking market, these carriers have suffered from weak freight demand since the third quarter of 2006, primarily because of the U.S. housing slump and the problems of domestic automakers.

For the fiscal year, the Memphis, Tennessee-based company said it expects a profit of $6.40 to $6.70 per share, down from a prior forecast of $6.70 to $7.10. Wall Street had been expecting $6.83.

FedEx shares were down $4.37 to $97.00 in midday trade on the New York Stock Exchange after falling as low as $96.10 earlier in the session.

UPS shares eased $1.89, or 2.6 percent, to $71.21, also on the NYSE.

So far this year, FedEx shares are down about 10 percent and UPS shares are down 5 percent. By comparison, the Dow Jones transportation index, which also includes railroads, airlines and trucking companies, is flat.

FedEx shares trade at 14.8 times estimated 2008 earnings, compared with multiples of 17.5 for UPS and 15.1 for the transport index.

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