Rel-e-vant  adj [from Latin relevare to raise up] 1:  having significant and demonstrable bearing on the matter at hand 2:  that's the United States Postal Service, keeping you in touch with what's important to you.

An economic recession began in 2001, and its effects have continued into this year. Since mail volume historically has tracked the economy, usually with some lag, our volume declined in 2002. In fact, we suffered our largest volume decline since 1946. The recession in the advertising market was particularly damaging, and it was only at the end of 2002 that the advertising industry began to show signs of recovery. Since advertising mail has been the main source of our volume growth and volatility in recent years, the collapse in this market seriously hurt our 2002 mail volume growth.

The events of September 11th and the anthrax attacks affected all mail categories with the possible exception of Periodicals. Both mailers and consumers became concerned about the security of the mail service, and disruptions resulting from these events caused mailers to delay or cancel mailings or use alternate providers.

The 7.7% average rate increase implemented on June 30 further reduced volume growth, especially in such competitive categories as Priority Mail and Express Mail. The early implementation of the rate increase, however, brought in an additional billion dollars in revenue.

The weak economy hurt letter mail (First-Class and Standard Mail) in 2002. In addition, electronic diversion continues to cut into the market share of letter mail products. Mailers are also continuing to develop methods to sort and deliver mail farther down our processing stream, thus shifting their mailings to categories with deeper worksharing discounts. All this affects the revenues of letter mail products.

First-Class Mail volume fell 1.2% this year. Electronic diversion continues to affect First-Class Mail. Even though many analysts predicted a spike in the adoption of Internet bill paying in the wake of the anthrax attacks, evidence suggests that the rate of adoption has remained basically the same. According to the Household Diary Survey, in 2000, 4.4% of households paid bills through the Internet. In 2001, this figure rose to 7.5%. For 2002, it is 11%. The proportion of bills that consumers pay through the Internet has risen from 3.2% in 2001 to 4.2%, or less than half of one bill per household. Between 2001 and 2002, however, the number of bills paid by mail per household has remained steady at about 8.5. In fact, the main source of growth in electronic payments in 2002 came from automatic deduction, which rose almost 30%. Mail is still vital to the payment processing system. With a slow economic recovery and continued electronic diversion, we expect First-Class volume to be essentially flat in 2003, growing by about 0.3%.

Standard Mail volume fell by 3.0% in 2002 as a result of the weakness of the advertising market. Nonprofit mail was especially hard hit, as organizations whose philanthropy was not directed to the victims and survivors of the September 11th attacks pulled back fundraising efforts. Standard Mail should grow slightly over 4% in 2003, accounting for most of our planned volume increase. This growth represents mailers returning to mail after the anthrax attacks, as well as assuming growth in the economy and a recovering advertising market.

Priority Mail volume fell 10.7% this year, continuing to slide further from the 8.6% decline of 2001. It dropped most sharply early in the year when package prohibitions on commercial airlines disrupted our transportation network. Price increases for Priority Mail further hampered growth. Since January 2001, Priority Mail prices have increased by 35%. Priority Mail is part of the highly competitive expedited package market where the actions of our competitors affect our volume. We anticipate that Priority Mail volume will continue to fall in 2003, responding to the 16% price increase in June 2002.

Package Services declined 1.6%, although Parcel Post grew 5.1%. Most of this growth came in bulk-entry products. Some of this growth represents migration out of Priority Mail, as mailers look for more economical means of shipping their merchandise. In particular, the increasing use of package consolidation services enabled mailers to take advantage of drop-shipping discounts. Additionally, since it moves over the road, Parcel Post avoided the restrictions on airline parcel carriage. In 2003, growth in Package Services should be effectively flat, with Parcel Post growth of less than 1%.

Periodicals were down by 3.8% this year, accelerating the long-term decline in household subscriptions. This reflected the large number of magazine titles that ceased publication during the recession. Remaining publications were hit hard by the shrinkage in the advertising market. Publication weight, advertising pages and per-piece revenue all declined in 2002. We expect volume to continue to decline in 2003 while the economy is sluggish.

International Mail shrank by 16.5% this year, a result of the worldwide recession and restrictions on mail carriage imposed after September 11th. The global economy appears to be lagging the that of the United States, and in 2003 we expect the decline in International Mail volume to continue. Customers will also explore alternative means to deliver international communications, further affecting this sector.

In 2003 we expect volume and revenue to stage a modest recovery from one of the worst volume declines in postal history as we recover from last year’s service disruptions. Overall, we expect a sluggish economic recovery to restrain volume growth in 2003. We think volume will expand somewhat less than 2%, leaving us with less mail than we had in 2000. Revenue will rise, however, as the full effect of the June rate increase flows through.