Mail volume is positively affected by economic growth. After a period of relative stagnation following the recession of 2001, economic growth picked up in 2003 and 2004, leading to 4.5% growth in the gross domestic product (GDP) for 2004, as projected by Global Insight Inc. We relied on Global Insight's August 2004 projection, which was the latest available when our 2005 Integrated Financial Plan was developed. Based on Global Insight's forecast, we expect GDP growth to moderate to an annualized rate of 3.5% in 2005.

Economy-wide retail sales, an economic indicator for Standard Mail and workshare First-Class Mail, grew 5.1% in 2004, but is expected to slacken, as a result of increased energy prices and interest rates. Increased energy prices are diverting consumer expenditures from other goods and services, and higher interest rates will dampen demand for mortgage refinancing and reduce the amount of cash consumers have available for large purchases. In addition, the stimulus from federal income tax cuts in 2003 caused a spike in retail sales during 2004 that will not be repeated in 2005. The projected 2005 retail sales slowdown leads us to project a lower growth rate for Standard Mail volume and to project a small volume decline in workshare First-Class Mail.

Employment is an indicator for our single-piece First-Class Mail volume. For many years now single-piece volume has declined. The moderate growth projected in employment by Global Insight is not sufficient to drive volume increases that overcome the negative impacts of electronic diversion.

Looking at single and workshare First-Class Mail volume together, we can see that economic growth has only attenuated the declines in First-Class Mail volume and revenue. We do not foresee a reversal of the multiyear downward trend in total First-Class Mail volume.

We also expect Priority Mail volume to decline slightly due to continued changes in the structure and competitive nature of the package services market. We think that Express Mail volume will stabilize after four years of decline because of higher prices charged by our competitors and the improvements we have made in this service. On the other hand, technological and demographic changes continue to cause declines in Periodicals. The growth we project in Package Services is based on projected increases in both Bound Printed Matter and Media Mail volumes, even though we expect a decline in Parcel Post.

While mail volume should grow in 2005, we have planned for revenues to fall. Total revenue in 2005 could be $700 million less than 2004 as we continue to lose our higher-revenue-and-contribution mail. As this mail declines, our margins are reduced, resulting in pressure on postal prices over and above the effect of inflation.

Network Growth

Historically, First-Class Mail volume and the growth in contribution it has produced have financed the cost of operating and expanding our delivery network. Over the last several years, however, the volume of First-Class Mail has declined while the number of delivery points in our network has continued to increase. Since 2001, First-Class Mail volume has decreased by over 5.7 billion pieces while our delivery network has expanded through the addition of 4.6 million new delivery points. Furthermore, we operate a retail network anchored by 37,159 Post Offices, stations, branches and contract units.

Delivering mail to individual delivery points six days a week is a major part of our work. Each year, we add between 1.6 million and 1.9 million delivery points to our network. From 2000 through 2004, the number of delivery points we serve has grown by 6.4 million. In 2004, we adjusted our reporting of rural and highway contract deliveries to customers who have their mail forwarded to a Post Office box as an alternative to a physical address. Prior to 2004 we included both addresses in our count of "possible" delivery points. We also no longer count a vacant delivery point on rural and highway routes as "possible" delivery points. These adjustments reduced our total delivery points by 824,388, and we have therefore adjusted our 2004 Operating Statistics in this report to reflect this change. Our actual growth in delivery points in 2004 was 1,782,900. We do not have the data to adjust the number of delivery points we reported for prior years.

We expect delivery point growth to continue for the indefinite future as a result of population growth and continuing demand for new housing. The Bureau of the Census reported housing starts in August 2004 at a seasonally adjusted rate of 2.0 million, up from 1.8 million in 2003. Also, Harvard University's Joint Center for Housing Studies reported that "household growth over the next ten years is expected to surpass that over the last ten years" and estimated "the total number of homes built in 2005–2015 could reach 18.5–19.5 million units" which "compares to the 16.4 million homes added in the 1990s."

This projected increase in household growth will translate into a continuing expansion of our delivery network. In the same period, First-Class Mail volume is projected to continue to decline. As the revenue and contribution produced by First-Class Mail decline, we will lose our primary historic means of financing our delivery and retail networks. This combination of trends will continue to challenge us at least through the next decade.

This challenge is best illustrated by the dramatic changes in the business environment we have witnessed in recent years. From 1997 to 2000, volume growth added $5.5 billion in annual revenues. From 2001 through 2003, declines in our volume reduced our revenues. In 2004, our volume and revenue increased only slightly. However, from 1996 to 2003, our delivery network grew by 12.1 million carrier delivery points, about 1.7 million a year.