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Don't Get Caught Up in Reports of Air Traffic Taking Off

Monday, 19 Jul 2010 03:19 PM

During the past couple of weeks, numerous airlines around the globe reported that they experienced substantial increases in their passenger traffic during June, as the total number of paying passengers times the distance traveled by those passengers rose considerably, as compared with the same month a year ago.

Many economists, stock market pundits and investors have interpreted those reports as a sign that economic conditions around the world are continuing to improve.

However, a closer review of those reports, and an understanding of some significant economic developments, paint somewhat of a different picture.

ALERT: Frazier: Stocks Rolling Over. Get Out Now.

For example, most airlines faced very favorable year-over-year traffic comparisons during June because during the same period a year ago, the worldwide economy was still in the midst of the worst economic recession since the 1930s. Therefore, even the modest economic improvements that most countries experienced during the past 12 months enabled those airlines to experience a big improvement in their air traffic.

Meanwhile, numerous economic factors and developments suggest that most airlines will face difficulty in increasing their air traffic during the second half of this year. That’s because those factors and developments indicate that both the U.S. and most foreign economies will grow at a much slower pace during the second half of this year than they did during the past six months.

For example, economic research firm The Conference Board recently reported that its index of leading economic indicators (LEI) for Europe and Japan declined during May (the most-recent month for which data is currently available).

Commenting on developments in Europe, the board’s senior economist said, “The first fall of the LEI for the euro area in 14 months suggests that the rebound in economic growth may have peaked during the second quarter.”

Although the board’s index of leading economic indicators for China rose during May, the Board’s resident economist said that he expects China to experience “less robust growth in the second half of the year.”

In a separate report, China’s National Bureau of Statistics announced on July 14 that its index of leading economic indicators for China fell for the third consecutive month. That report followed an announcement from the China Federation of Logistics on July 4 revealing that manufacturing activity in China declined for the second month in a row during June.

Meanwhile, the Baltic Dry Index, which measures freight-load on cargo vessels, revealed that the international demand for imports and exports fell sharply during June.

Lastly, numerous economic statistics indicate that the recent improvements in the U.S. economy might be nearing an end.

For example, the Federal Reserve Bank of New York announced last Thursday that its index of manufacturing activity in the tri-state area of New York, New Jersey, and Connecticut declined sharply during June while the Federal Reserve Bank of Philadelphia reported that manufacturing activity in its region also slowed during June.

Those announcements follow a report issued last Wednesday by the U.S. Department of Commerce showing that sales of goods and services at U.S. retail stores declined for the second month in a row during June, falling 13 percent during May and 6 percent during June.

Of utmost importance, U.S. business spent less money on restocking their product inventories during June, thus indicating that business, in the aggregate, are preparing for weaker sales during the coming months.

That’s a very significant development because the increases in the United States’ output of goods and services (gross domestic product or GDP) during each of the past three quarters were due largely to businesses replenishing their inventories. For example, 68 percent and 55 percent of the increase in GDP during the quarters ended December 31, 2009 and March 31, 2010, respectively, were due to businesses restocking their product inventories.

If American households were to continue to reduce their spending on various types of consumer goods and businesses were to continue to reduce their spending on restocking their inventories, there’s a good chance that the U.S. economy will fall back into a recession.

That’s because personal consumption expenditures have accounted for approximately 70 percent of the total output of goods and services in the United States while business spending and investments have accounted for another 16 percent of GDP since the beginning of the past decade.

In light of the factors and developments mentioned above, I urge you to not get too optimistic about the supposedly positive reports concerning airline traffic.

Note from Moneynews:
If you’d like to be kept abreast of actual economic and financial developments and their longer-term effect on securities prices (rather than relying on misrepresentations like the ones discussed above), try a free sample of David’s investment advisory service, The ETF Strategist. 
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About the Author: David Frazier
David Frazier is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes two very successful investment newsletters. Discover more by Clicking Here Now.

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During the past couple of weeks, numerous airlines around the globe reported that they experienced substantial increases in their passenger traffic during June, as the total number of paying passengers times the distance traveled by those passengers rose considerably, as...
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2010-19-19
Monday, 19 Jul 2010 03:19 PM
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