Boeing Company (The)

BA
Delayed Nyse - 05/24 10:00:05 pm
354.9USD
+1.24%

Will Boeing's 737 max crisis drag down the US economy?

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04/18/2019 | 12:09 pm
In a new report, Wells Fargo warns of the economic impact of Boeing’s production cuts. The planemaker is the US largest exporter, and the effect on GDP could soon be felt.


Following weeks of turmoil, Boeing announced on April 17 that it has performed the last test of the 737 MAX before the certification flights. The group's CEO said that in total his pilots flew 120 flights totaling 203 hours with the corrected software.

The entire fleet of 737 MAXs has been immobilized since mid-March after an Ethiopian Airlines aircraft of this type crashed southeast of Addis Ababa a few minutes after takeoff, killing 157 people. This tragedy occurred just over five months after the accident of a 737 MAX Lion Air aircraft that killed 189 people. In both accidents, the MCAS stall protection system was involved.

An impact on US GDP

In a new report, Wells Fargo points out Boeing’s decision to halt deliveries and scale back production of its 737 MAX family of aircraft is significant enough to hit the U.S. economy. “The net effect will be a drag on second quarter GDP growth of about two tenths of a percentage point,” it predicts.

Recent production cuts and delivery are expected to ripple through different economic indicators and line items in the GDP report:
 
Source: U.S. Department of Commerce and Wells Fargo Securities

Since the first shipment in May 2017, Boeing has delivered just 376 of the aircraft, and it has a substantial backlog of orders as a result. The group now plans to cut production of 737s to 42 aircraft per month by mid-April, down from 52.

Ripple effect throughout the year

“Aircraft and related parts account for only 2.7% of industrial production, but the 737 MAX made up roughly two-thirds of Boeing’s deliveries in the past six months. The 20% production cut could therefore shave off 0.3-0.4 percentage point from industrial production growth in April”.

The financial services company expects to see the value of durable goods shipments dragged down until deliveries resume.

Over the remainder of the year, Well Fargo believes that the precise impact to its GDP outlook depends on a number of factors, including how long Boeing produces at the lower rate, when aviation authorities around the world give airlines the all clear and how quickly Boeing can clear its backlog of shipments.

“Shipments will eventually resume once the 737 MAX is given the all-clear to fly again. As the stockpiled aircraft are eventually delivered, inventories will be drawn down, thus generating a drag on GDP growth during the quarter in which that drawdown occurs. The value of equipment and exports, however, would also rebound during that same period. If business were to return fully back to normal in the third quarter, equipment spending and exports would flip to become major positive contributors to GDP growth, while inventories would flip to becoming a significant drag.”
Romain Fournier
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