Air Freight — A Much Ignored Leading Economic Indicator Takes Flight

Over on Supply Chain Matters, Bob Ferrari recently took a few minutes to highlight the importance of air freight as a leading economic indicator. Air freight you say -- how could such a small piece of the overall logistics market signal growth or contraction? According to another blog post and additional research that Bob quotes, "If you want to know how good or bad business really is, just note air freight volumes ... [one study notes] the correlation of U.S. GDP to the index of air cargo activity is 70%. [And another] study sponsored by the International Air Cargo Association suggests there is a well-established correlation between air cargo growth to growth in GDP. In fact, the study noted a 97% accuracy in calculating either."

Based on this clear correlation, Bob took it upon himself to examine whether or not FedEx's most recent financial and traffic numbers presage a recovery or additional economic pain. Now, FedEx only represents one player in the air freight market (with arguably greater exposure to the domestic US market than some of the other leading players). But Bob's back-of-the-napkin analysis is telling. He suggests that their current figure "of between 460 and 480 thousand daily packages is still far away from the daily peak of 500 to 520 thousand daily packages". In his view, based on the data, Bob suggests "GDP recovery, both in the U.S. as well as internationally, still has a ways to go. Again, a very unscientific analysis, but the numbers don't seem to reflect that economies are back to normal."

While I agree this is a useful leading economic indicator to look at, there are reasons why air freight might not be rising to the same levels of the past given the overall economic situation. For one, companies tend to use air freight when expediting, and surprisingly, the latest inventory numbers I saw last weekend, were actually higher than where I thought they would be. Moreover, air freight numbers are impacted more these days by what I might term luxury consumables (e.g., expensive and perishable food products) which may not have been factored into the equation as much in the past and may be less of a leading indicator-- and more of a lagging one -- of recovery than the previous types of cargo that used to predominate. As an example here, just look at how the price of lobster has crashed this year because of a drop in demand, among other reasons. Still, I commend Bob for doing the analysis. All in all, it serves as yet another singular data point that we're not out of this mess yet.

Jason Busch

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