03/10/2020

Halt in 737 MAX production is expected to trim growth in first half of 2020

In January, Boeing halted production of the troubled 737 MAX, its best-selling jet. The shutdown is likely to reduce U.S. gross domestic product in the first half of the year, economists say.The Chicago-based aerospace giant has been in a crisis since last March, when regulators ordered airlines to stop flying the 737 MAX after faulty software was implicated in two fatal crashes. Until last month the economic fallout was minimal. While Boeings sales tumbled, it continued to produce the jet at a reduced rate at its factory near Seattle, working through a backlog of 4,500 orders.
Boeing said last week it doesnt expect to restart production until it gets regulatory approval to resume flying, which it hopes to secure by midyear and then slowly ramp up production over the next two years.
Boeing had been building about 42 jets a month since April, and about 52 a month before that. That might not sound like a lot. But the 737 MAX sells for about $55 million apiece, analysts say, and Boeing had planned to sell more than 600 this year, totaling more than $30 billion. It uses a network of 600 major suppliers providing everything from engines to seats to bathrooms. Boeings Seattle-area factories alone employ 12,000 workers on the MAX.
At least three leading economists say the shutdown will reduce first-quarter GDP by half a percentage point. Second-quarter output could also take a hit, since Boeing said it would need two months or more to ramp up production once it decides to resume building the MAX.
IHS Markit economist
Joel Prakken,
who predicts U.S. output will grow at a 2.0% annual rate in the first quarter, says the impact of the Boeing crisis is bigger than what you would see in a hurricane. He said the production halt could reduce output by $9 billion in the first quarter and $13 billion in the second. The latter figure is roughly equivalent to more than two billion McDonalds Big Macs.
Two crashes and the global grounding of Boeings 737 MAX commercial airliner led to extensive disruption in the international aerospace industry. WSJs Robert Wall explains the continuing effects of the planes grounding. Photo: Getty Images
The economy grew at a 2.1% rate in the fourth quarter, the Commerce Department said last week, and 2.3% in all of 2019, when output totaled $21.4 trillion. Economists say Boeings troubles weighed modestly on output last year, when the company and its suppliers cut production and some flights were canceled.
Growth is likely to bounce back when Boeing resumes production and sells planes that have been stored around the country, lifting economic output and exports in the second half of 2020 and early next year. The extent of the damage hinges on the shutdowns duration and how Boeings suppliers react.
General Electric Co.,
which makes engines for the MAX in a joint venture with Frances
Safran SA,
said it plans to produce at half the rate of last year.
Spirit AeroSystems Holdings Inc.,
which makes the jets fuselage and is the largest MAX supplier, plans to lay off 2,800 staff. It aims to make around 200 this year, a third of output in 2019.
But Boeing itself and most parts suppliers have redeployed workers rather than laying them off. With unemployment at a half-century low of 3.5%, skilled workers would quickly find new jobs, according to Mr. Prakken.
Companies are a little reluctant to start laying off people who have specialized knowledge on these assembly lines, he says.
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Joe Brusuelas,
chief economist at RSM, says economists and investors may be underestimating the potential of a bigger hit as U.S. aerospace supply chains are disrupted.
Once those supply chains are shut down and labor begins to disperse into other jobs and other areas of the country, restarting those supply chains is much more difficult than commonly acknowledged, he said.
It isnt the first time that U.S. growth has been affected by the travails of a single company.
Last year, more than 46,000
General Motors Co.
workers went on strike for 40 days, stopping production at more than 30 U.S. factories. Treasury Secretary
Steven Mnuchin
last month said the job action, among other factors, may have reduced U.S. output in 2019.
Boeing poses broader risks. One is that regulatory approval for the MAX is delayed again, forcing the company to push production back further. Another is that passengers refuse to fly on them, hurting airline profits and potentially exposing Boeing to higher compensation claims. And there is the danger that Boeings customers turn to European rival
Airbus SE
or China, which has sought to break up the duopoly through its jet maker Comac, which will start delivering planes early next decade.
Write to Josh Mitchell at joshua.mitchell@wsj.com and Doug Cameron at doug.cameron@wsj.com
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