Boeing’s 737 Max Production Halt Is Drag on US Economy, Economists Say

February 3, 2020 Updated: February 3, 2020
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WASHINGTON—Boeing’s halt to production of its troubled 737 Max airliner beginning last month is having an effect on the broader U.S. economy, according to lead economists.

Boeing was forced to ground its most popular passenger jet in March last year after two fatal crashes that killed a combined 346 people aboard. Since then, the aircraft manufacturer has been struggling to clear regulatory demands to return the plane to service.

The American Bankers Association’s economic advisory committee, composed of 15 chief economists from large U.S. banks, predicts that production shutdown by Boeing will be a major drag on the economic growth in early 2020.

“We are expecting to see significantly weaker economic growth in the first quarter of 2020 because of the impact of the production cuts,” Gus Faucher, a committee member and chief economist at PNC Financial Services Group, told The Epoch Times.

Boeing has “knocked off four-tenths of a percentage point of annualized growth in the first quarter,” he added, referring to the committee’s economic forecasts report released last month.

Boeing’s decision to halt production temporarily meant that the company would not be adding to inventories, Faucher explained, which would have a significant impact on the U.S. gross domestic product (GDP) growth in the first quarter.

He added that the effects could persist into the second quarter.

Boeing had continued to build new airplanes at a reduced rate last year despite the issues with the 737 Max. The new jets were being held as inventory. The company announced that it had nearly 400 airplanes in storage waiting for certification to return to service.

The production shutdown will also weigh on the labor market, according to Faucher, as Boeing’s subcontractors would be making job cuts.

The company recently announced that it doesn’t expect regulatory approval until the middle of 2020, which prompted President Donald Trump to call Boeing a “big disappointment.”

Treasury Secretary Steve Mnuchin estimated last month that the Boeing crisis could slow the U.S. economic growth by half a percentage point.

“Boeing is one of the largest exporters, and with the 737 Max, I think that could impact GDP as much as 50 basis points this year,” Mnuchin told Fox News.

Spillover Effect

Most economists, however, are optimistic that Boeing will resolve its issues and restart production this year, which will help the economy to pick up again and reverse the negative effects of the production shutdown.

According to the latest forecast of the committee, the U.S. economy will continue to grow and maintain a strong labor market in 2020 despite a range of uncertainties ahead including the November general election.

The economists predict that the slow down of nonresidential fixed investment, a key measure of business spending, has bottomed out and will increase this year to 2 percent from 0.4 percent in 2019.

However, the duration and the extent of the ongoing issues in the aerospace industry due to Boeing represents a major downside risk to this positive outlook, according to Catherine Mann, chair of the committee and chief economist at Citigroup.

“It’s important to recognize that producing an aircraft is a very complex process and that parts are made essentially everywhere,” she told The Epoch Times.

“It’s not just one company that has gotten engaged. It’s many companies that are engaged,” she said, adding that the “macroeconomic spillover depends on how each one of those companies can manage the exposure that they have to ongoing risk.”

Boeing’s troubles have had negative spillover effects on thousands of subcontracting firms, U.S. Chamber of Commerce President and CEO Thomas Donohue said at a press conference on Jan. 9.

“I think one of the realities that affected the economy and affected the people’s concern [last year] was the Boeing incident. Because Boeing probably has 15,000 to 18,000 subcontractors,” he said in response to a question by The Epoch Times.

Business investment slowed sharply last year, prompting analysts to read it as another recession sign and blame the U.S.–China trade war for the slowdown.

However, Boeing was one of the main culprits, according to Jim Glassman, head economist for JPMorgan Chase’s commercial banking operation.

He claimed that the Boeing crisis has had a negative effect on the U.S. economy since the worldwide grounding of 737 Max airliner, following accidents in Indonesia and Ethiopia. The cutback in plane production last year had shaved approximately half a percentage point from GDP growth in the second quarter of 2019, he said in a report.

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