Boeing Production Cut Will Pare Half-Point from GDP, Says JPM Economist

Loss of the troubled 737 MAX will lower US industrial output, Michael Feroli warns.

Halting production on Boeing’s best-selling, if trouble-prone, airliner will lop 0.5 percentage points off US gross domestic product in next year’s first quarter, according to Michael Feroli, JP Morgan’s chief US economist.

The 737 Max was grounded in March after two fatal crashes, in Ethiopia and Indonesia, prompted widespread criticism of its automatic safety system, which apparently caused the twin catastrophes. The timeframe for the airliner’s return to service is unclear, but the company’s decision to pause production was made as a cost-savings move.

Boeing is the US’s largest goods exporter and the fourth largest stock in the Dow Jones Industrial Average. Since February, Boeing has lost 25% of its market value.

The impact on GDP in 2020’s first quarter will be the result of the output decline that the production pause will trigger, Feroli explained in a research note. “Accordingly, the expected drag on 1Q GDP growth should be concentrated in reduced inventory accumulation,” the economist wrote. He added that, once the MAX is cleared to fly, that slump should be offset by the new plane output.

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GDP growth for 2020’s first quarter should be 2.1%, the Conference Board estimates. If Feroli is right, then the period should see only a 1.6% expansion. The Conference Board projects 2.0% growth in the current fourth quarter.

Up until now, the aircraft maker had reduced production to 42 per month from 52, he added, which didn’t make much of a mark on economic statistics. Inventories of commercial aircraft and parts, a category that’s risen steadily over the past 15 years reached a record $78 billion in October, US Commerce Department statistics indicate. This has been a bright spot in amid a general shrinking in American manufacturing output.

The effect of the Boeing time-out is bound to ripple out from the aerospace giant to suppliers, such as General electric, which makes the MAX’s engines in a joint venture with France’s Safran.

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