Boeing will halt production on its bestselling jet next month. That’s bad news for the American economy.
The aircraft manufacturer Tuesday announced its decision to stop building the 737 Max jet, which has been grounded worldwide since March following two fatal accidents within five months. The 737 Max is by far Boeing’s (BA) most in-demand plane.
And since Boeing is one of America’s largest manufacturers as well as its No.1 exporter, the suspension of its biggest product could weigh on US GDP growth early next year.
A production shutdown that lasts through the entire first quarter could knock a half-percentage point off the annualized first-quarter GDP growth rate, according to Michael Pearce, senior US economist at Capital Economics in a note. Joseph Brusuelas, chief economist at RMS US, also expects a half-percentage point drop.
JPMorgan economists Michael Feroli and Daniel Silver expect a slightly higher hit, of 0.6 percentage points.
News of the production cut knocked Bank of America’s GDP forecast for the first quarter down to an annualized rate of 1.2% from its baseline forecast of 1.7%, according to the bank’s economists Stephen Juneau and Michelle Meyer.
After the market close, Moody’s Investors Service said it downgraded Boeing’s credit ratings, to A3 from A2, which is still investment grade. Moody’s changed its outlook for the company to stable from negative, citing Boeing’s “strong liquidity and financial flexibility.”
Boeing’s troubles are also expected to keep dragging down US manufacturing, which has suffered in recent months. FedEx (FDX) Chairman Fred Smith on Tuesday cited the 737 Max halt, along with the recent 40-day GM strike, as problems for a struggling US industrial economy.
But the 737 Max has been grounded for most of the year already. Why haven’t Boeing’s problems already weighed on the economy? Partly because Boeing did not want to cause problems for its supplier base, the company continued to build the 737 Max even during the grounding. Boeing has about 400 planes awaiting delivery.
The company’s sales are down because it doesn’t get fully paid until planes are delivered, a negative for GDP growth. Yet at the same time, its inventories have been building, which is helpful for GDP growth. Aircraft production is measured first in the form of inventories in national accounts, and upon delivery account for a spike in sales, said Juneau and Meyer.
Hence, “the decision to stop producing means that the surge in inventories will end, resulting in a big drag on economic growth in the first quarter,” said Pearce.
Another factor that could hurt the economy is layoffs. Boeing has said it has no plans to cut staff because of the 737 Max. Workers will be reassigned to other jets and products, the company said. But there could be cutbacks among Boeing’s supply chain, which could hurt consumer spending and weigh on economic growth.
If, however Boeing resumes production after the first quarter of 2020, economists could write off the effect of the production halt as a one-off event.
“Importantly, the expected drag from Boeing should be transitory,” said Juneau and Meyer. “Therefore it does not materially change our 2020 outlook for growth or monetary policy.”
The Federal Reserve cut interest rates three times this year to boost growth, but has since taken its foot of the gas. If Boeing’s drag on the economy is as brief as expected, the central bank will have no need to rethink its strategy.
And once the 737 Max production resumes and the jets fly again, Boeing’s activity would give the economy a boost.
