Our mail volume and revenue growth is influenced by fluctuations in the business cycle. Although strong economic recovery after a recession has been typical in the U.S. economy, such a recovery has not occurred in this business cycle.

     The most recent recession officially ended in November 2001, according to the National Bureau of Economic Research. In contrast to previous economic recoveries, however, employment is still over 2 million jobs below its pre-recession peak. Where we would normally expect increasing employment, we see continued job losses. This weakness in employment affects our mail volume because 79% of all mail originates from or is delivered to households. If employment does not increase, we expect continued weakness in mail volume.

     In light of the slow recovery and indications that mail volume growth is a lagging indicator, we project total volume growth of just over 1% in 2004. If the economic recovery does not gain traction as the year progresses, we will make any necessary adjustments in our operations.

     We expect First-Class Mail volume to decline for the third straight year, reflecting the continued impact of electronic diversion and sluggish economic growth. Standard Mail volume may benefit from the telemarketing regulations known as the "do not call" list that the Federal Trade Commission implemented in the fall of 2003. Standard Mail volume will also benefit from any economic growth and should grow faster in 2004 because the 2002 rate increase will have been fully absorbed by mailers. As in 2003, lower-margin Standard Mail will be our only significant source of volume growth. We expect Priority and Express Mail volume to continue to decline as the market moves to lower-priced ground shipment alternatives. This trend should favor our destination-entered Parcel Post products, pushing up the volume in the Package Services category. On the other hand, we expect the long-term decline in Periodicals and International Mail to continue.

     Historically, the growth of First-Class Mail volume has financed the cost of expanding our delivery network. However, over the last several years the volume of First-Class Mail and the number of delivery points have moved in opposite directions. Since 2001, First-Class Mail volume has decreased by over 4 billion pieces while our delivery network has expanded by 3.7 million new delivery points. We absorbed these deliveries through productivity increases rather than hire the equivalent of 4,000 new carriers each year as well as purchase new vehicles and add facilities space.

     We expect this delivery point growth to continue for the indefinite future. The Bureau of the Census reported housing starts in August 2003 at a seasonally adjusted rate of 1.82 million, while Harvard University's Joint Center for Housing Studies reported that housing production in the current decade is expected to "exceed the 16.6 million units built and manufactured between 1991 and 2000" due to "increasing household growth, strong demand for second homes and better balance in rental markets." Additionally, strong immigration, younger members of the baby-bust generation living on their own, aging baby-boomers purchasing second homes and shifts in family composition contribute to a projected average annual demand for 1.7 million new housing units.

     Salaries and benefits are our biggest expense, and this expense is determined by the number of employees, the number of hours they work, their rates of pay and the benefits they receive, such as health and retirement benefits. Our expenses are also affected by increases in the premiums for the health plans of our retired employees. A significant source of expense growth in recent years has been the inflation in health benefits. Federal Employee Health Benefit Program premiums increased 13.3% in January 2002 and by 11.1% in January 2003. Premium increases averaging 10.6% are scheduled for January 2004. This has translated to health benefit cost increases of $471 million in 2002 and another $471 million in 2003.