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Is Consumer Spending Trending Up? Airline Stock Impact

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Jan. 30 2017, Updated 3:36 p.m. ET

Consumer spending

Consumer spending accounts for the majority (~70%) of the US economy. For 4Q16, consumer spending rose 2.8% year-over-year or YoY. This is lower than expected growth and also lower than the 4.2% YoY growth seen in the second quarter of 2016.

According to University of Michigan Consumer Sentiment Index, consumer confidence for January 2017 surged to 98.5%, 6.5 percentage points higher than January 2016. It was also higher than the 98.2% and 93.8% consumer confidence levels seen in December and November 2016, respectively.

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Job growth, however, was slower than expected. In December, 156,000 net jobs were added, compared to 216,000 jobs added in November, 191,000 jobs added in September, and 176,000 added in August. In 2016, jobs grew by just 2.2 million—slower than the 2.7 million added in 2015. Growth is, however, a lagging indicator.

The unemployment rate also increased to 4.7% YoY in December 2016.

Consumer spending

As long as consumers continue to spend, airlines should continue to see traffic growth. So the main question is: will consumers continue to spend?

All the above factors continue to point toward a positive outlook. Most economists are expecting consumer spending to increase through 2017, mainly due to wage growth.

Other factors that impact the airline industry include travel demand, capacity, utilization, and yield. Next, we analyze the airline industry demand.

Investors can gain exposure to the iShares Transportation Average ETF (IYT), which invests 23% of its portfolio in airlines. It invests 5.5% of its holdings in Alaska Air (ALK), 5.3% in United Continental (UAL), 3.8% in Southwest Airlines (LUV), 3.6% in Delta Air Lines (DAL) and 3.4% American Airlines (AAL).

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