UPDATE 2-Strong economy, higher rates lift FedEx quarterly profit

(Adds details on results)

March 20 (Reuters) - Package delivery company FedEx Corp on Tuesday reported a higher quarterly net profit on revenue gains, strong volumes and changes to U.S. tax law even as it was hurt by peak holiday season costs and bad weather.

Shares in the Memphis-based company, considered an indicator of U.S. economic strength like its main rival United Parcel Service Inc, initially rose 2.6 percent in after-market trade following the results but settled down slightly.

"We view this quarter as a bit of a disappointment due to weakness in the Express business," Edward Jones analyst Logan Purk said in a client note, adding strong package volume and higher package revenue were offset by higher expenses in its Express unit.

Higher peak-related costs, integration costs of its Dutch TNT Express unit, bad weather, and other factors sapped profit by about $170 million year-over-year, FedEx said.

FedEx said its daily package volume was up 6 percent in the quarter, driven by demand during the peak holiday shipping season that begins after the U.S. Thanksgiving holiday and lasts through year-end.

FedEx investments to expand capacity and choose higher-profit shipments, coupled with higher prices and volumes, paid off slightly as its ground unit saw quarterly operating margins rise to 12.1 percent from 11 percent in the year-ago period.

Like its main rival, FedEx has spent billions of dollars on upgrading its network to handle rapidly rising deliveries of products ordered online, and investors have watched eagerly for evidence the investments were paying off.

"Execution of long-term growth strategies, customer demand for the unique value of our broad portfolio of solutions and healthy growth in the global economy are driving our performance," FedEx Chief Executive Officer Fred Smith told analysts on a call following the results.

FedEx posted net income for the fiscal third quarter ended Feb. 28 of $2.07 billion, or $7.59 per diluted share, up from $562 million, or $2.07 per share, a year earlier.

Adjusted for one-time items, the company reported earnings per share of $3.72. Wall Street analysts had expected earnings per share of $3.11.

FedEx lowered it 2018 capex spending forecast by $100 million to $5.8 billion. It also said it would add 500 Office locations inside Walmart stores over the next two years.

Revenue for the quarter was $16.5 billion, versus the $16.16 analysts expected.

The quarterly results include benefits of $1.53 billion, or $5.60 per diluted share, due to changes to U.S. tax law. (Reporting by Eric M. Johnson in Seattle Editing by Cynthia Osterman and Tom Brown)