Following two fatal crashes at the turn of 2019, authorities around the world banned Boeing’s new 737 Max jet from flying. Boeing has continued to make the jet (at 42 per month) but sales have fallen significantly. Unsold inventories are piling up (currently at 400) and in response Boeing has announced that they will suspend production of the jet at the start of 2020.
The direct effects of these production cuts are estimated to be around 0.12% of the USA's gross domestic product (GDP). Given that the US ‘annualises’ growth, this would be a 0.5% shock to quarterly GDP growth (the current consensus forecast is for 1.75% annualized growth during the first quarter of 2020, so it would fall to around 1.25%). But the effect on the year as a whole would be just 0.12%.
The impact on manufacturing output should be around 1% (the US doesn’t tend to annualise manufacturing data). A 1% fall in manufacturing output is historically equivalent to a five-point fall in the Institute of Supply Management (ISM)/purchasing manager's index (PMI) new orders balance. However, the effect should be smaller than this because these surveys measure the proportion of companies reporting higher/smaller orders, rather than the magnitude. Even though two-thirds of the jet’s value comes from Boeing’s suppliers, it should still be a relatively concentrated shock.
The risks to this shock seem balanced. The upside risk is that Boeing does not intend to furlough any workers. Boeing has a backlog of orders worth 7.1 years, so in theory workers and machines could be reallocated to other projects. In practice, our company analysts believe this will be hard to achieve given the specialised nature of work. In this instance labour incomes would hold up but the fall in GDP would be recorded in weaker corporate profits.
The downside risks are the multiplier effects. Although Boeing has promised to support suppliers, the longer the jet is suspended, the more likely it is that workers and managers at Boeing’s suppliers get nervous and cut their own consumption and investment. So there would be a knock-on effect to consumer spending and capital expenditure. Again, it depends on whether there are other backlogs that Boeing’s suppliers can work on.
For now, we remain strapped in, but don't expect Boeing to be ready for takeoff any time soon.