WASHINGTON: Boeing's decision to stop production of its best-selling 737 MAX aircraft involved in two fatal crashes will impact U.S. economic growth and employment, but the pain may be brief and concentrated in areas where suppliers are located, analysts and executives say.
The biggest assembly-line halt in more than two decades at Boeing could cut first quarter 2020 gross domestic product growth by at least half a percentage point, economists estimated on Tuesday. The hit to GDP growth would come from a smaller inventory build.
Boeing holds unique sway in the U.S. economy as the largest U.S. goods exporter and also as the largest weight in the Dow Jones Industrial Average, the blue-chip stock index tracked worldwide as a bellwether of wealth creation.
The suspension of production comes as the manufacturing sector is starting to regain its footing after being pressured by a 17-month trade war between the United States and China, which has eroded business sentiment and helped to undercut capital expenditure.
Since a global grounding of the Boeing 737 MAX in March that froze deliveries, the aircraft manufacturer continued production of the aircraft. The resulting surge in aircraft inventory offset the drag on GDP growth from reduced exports and business spending on equipment.
"With deliveries of the plane already halted, exports and investment in aircraft are unlikely to fall much further," said Michael Pearce, a senior U.S. economist at Capital Economics in New York. "But the decision to stop producing means that the surge in inventories will end, resulting in a big drag on economic growth in the first quarter."
Economists do not anticipate an impact on growth for the full year as production of the plane is likely to resume sometime in 2020. They expected the Federal Reserve, which last week signalled interest rates could remain unchanged at least through 2020, would view any weakness in first-quarter growth as temporary, provided the production pause did not extend beyond the first half of next year.
"Once production is resumed, we expect to also see sizeable effects through the GDP accounts," said Robert Rosner, an economist at Morgan Stanley in New York. "Investment and export data will likely be boosted considerably as aircraft are shipped out, while inventories should decline."
Federal Reserve Bank of Boston President Eric Rosengren expressed concern about Boeing's problems.
"Boeing does employ a lot of people and one of our major exports has been Boeing planes," he told Reuters. "It's definitely not good news that Boeing is continuing to have difficulties getting their planes back up and running."
Boeing has also had made a notable contribution to investors' wealth. While its share price has lost a quarter of its value since March, it remains one of the past decade's best-performing stocks, gaining more than 500 per cent, roughly three times the gain for the entire Dow.
Its total market value has risen by nearly US$145 billion in 10 years, and it has shelled out another US$62 billion to its investors in the form of dividends and stock buybacks.
The effects of the production halt are likely to ripple through other sectors of the economy. Boeing has not said how long production will be frozen but the Society of Professional Engineering Employees in Aerospace, a union representing Boeing and its suppliers' workers, said: "The company expects the shutdown to be measured in weeks, not days."
Though Boeing has said it would not lay off any of the roughly 12,000 employees who make the 737, economists expect some of the more than 600 smaller companies in the supply chain to lay off or furlough employees, or cut their hours. These developments would impact on U.S. employment data.
Wichita, Kansas-based Spirit AeroSystems, for example, already cut contractors and temporarily reduced the work week for employees to 32 hours in June. They went back to full-time employment in September.
Boeing is Spirit's biggest customer. It makes an estimated 70 per cent of the 737's parts and employs 17,000 people around the world, including more than 10,000 in Wichita, where it is the biggest employer in a city of about 390,000 residents with a 3.1 per cent unemployment rate.
Seattle, where the bulk of Boeing's employee base is located, has a 3.3 per cent unemployment rate.