How Boeing's 737 Max Crisis Is Hurting U.S. GDP Growth

The grounding of the 737 MAX jet at Boeing Co. (BA), the largest American manufacturing exporter and one of the nation's biggest private employers, is weighing on the U.S. economy. In the wake of two disastrous commercial airline crashes, Boeing's reduced production has left lines of MAX jets piling up at Boeing factories. This has put pressure on airlines, alongside the thousands of suppliers that invested heavily in MAX production, affecting their hiring and investment decisions, according to a story in the Wall Street Journal as outlined in detail below. 

Boeing's impact comes as the economy already is expected to post a modest 2% gain in GDP in the second quarter, partly due to the U.S.-China trade war, a growth rate far below the goals of the White House. “It has already been a significant part of the slowdown story,” said Ward McCarthy, chief financial economist at Jefferies LLC. 

MAX Crisis Intensifies Trade Woes

The U.S.-China trade war already has caused manufacturers to reduce output due to higher levies and higher costs. And now, Boeing’s reduced MAX output is further hurting U.S. exports and durable goods orders. In May, there was a 1.3% month to month decline in U.S. durable-goods orders, dragged down by a $2 billion dip in sales of civilian aircraft and spares. Meanwhile, for the first five months of 2019, U.S. exports of commercial aircraft fell 12% versus the same period last year. 

Analysts surveyed by the WSJ forecast the U.S. economy will grow in Q2 at an annualized rate of 2%. JPMorgan U.S. chief economist Michael Feroli says MAX production cuts have shaved about 0.1% of his forecast, a seemingly small amount. But economists say that the impact would be more pronounced if Boeing cuts production further, which some analysts are forecasting. While the company hopes to resume deliveries in the final quarter of 2019, some analysts expect the MAX to stay out of air service into 2020.

Damage to Airlines, Suppliers

Boeing has been forced thus far to reduce by nearly 20% production of the MAX and other versions from 52 in April to 42 per month. The 737 MAX series is Boeing’s best-selling plane and the crisis puts at risk a MAX order book initially valued at more than $600 billion, according to Bloomberg. 

The grounding as well as the halt in deliveries has already led companies such as American Airlines Group Inc. (AAL) and General Electric Co. (GE) to cite financial damage or suspend profit guidance, per the WSJ. Domestic and foreign airlines have reduced routes and capacity growth, and delayed hiring and promotions. That could worsen if Boeing is unable to recommence deliveries. 

Looking Ahead

To be sure, analysts at JPMorgan say the MAX crisis will have no short-term impact on GDP. But, they add that conditions could deteriorate "if the issues are not resolved in a timely manner and production of the 737 MAX needs to be halted for a spell,” as cited by Business Insider. It would shave about six-tenths of a percent off the quarterly annualized growth rate of GDP in the quarter in which production is stopped." For context, the forecasted economic impact would be bigger than January’s government shutdown, the longest in U.S. history.