Boeing’s announcement this week that it would halt production of its troubled 737 Max in January 2020 will have an impact that extends far beyond its own business, and will most likely shave 0.5% off first-quarter GDP in the United States. The damage will ripple throughout the economy, affecting everything from inventory channels, factory orders, industrial production and, ultimately, headcount among Boeing’s vast network of suppliers.
Until now, Boeing has continued to produce the planes – about 40 a month, which are stacking up in its parking lots — while it tried to fix the problems that led to two crashes and 346 deaths. The plane was grounded in March.
Initially, we had estimated overall economic growth in the first quarter of 2020 to be 1.3%, but with Boeing’s announcement we now see GDP falling below 1%. And that could go even lower, depending on how long Boeing halts production.
Once Boeing gets production back up and running, whenever that is, we assume that current orders and those in the pipeline will not get canceled, which will contribute to growth either in late 2020 or early 2021.
Boeing is what our European friends would refer to as a national champion. Put another way, the aerospace giant is simply too big to fail from an economic standpoint, and too important to fail from a national security standpoint.
To put this in perspective, at an RSM event in Wichita, Kansas, this summer, one attendee indicated that if the grounding were to become a production halt it would be an existential risk to that midsize firm. It cannot be overstated just how important the domestic and global supply chains associated with Boeing are to the small- and medium-sized businesses that populate the real economy.
While Boeing has said that it does not expect furloughs or layoffs and will instead look to reassign workers, we think that is a narrow statement that pertains to direct production owned by the firm.
First, if this halt in production goes on more than 30 to 60 days, we would expect the shedding of high-paying jobs associated with 737 Max production. Second, firms along the supply chains, especially the small- and medium-sized companies, will not have the luxury of reassigning workers. Recall that when production was temporarily halted this past April, production dropped by greater than 40%. It is difficult to construct a scenario where a complete halt does not affect ecosystem hiring based on recent history.
Moreover, this is not just a domestic story. This will influence supply chains across Northeast Asia and the European Union. Depending on the plane global supply chains provide 25% to 30% of materials and services spread over 65 countries. This is a truly global economic event that will adversely impact employment along those supply chains.
Because we are in the early days, we do not have a point estimate on the impact of global growth. But it will put downward pressure on the consensus global growth rate of 3%, which is widely considered the minimum necessary to prevent the international economy from slipping into recession.