The 737 MAX crisis at Boeing Co. (BA), one of the nation's biggest publicly traded companies with a market capitalization over $200 billion, risks dragging down a weakening U.S. economy. Many forecasters are already significantly shaving their GDP forecasts, and cancelled or slowing orders and delayed production at America's largest exporting company, Boeing, could ripple across the entire job market, possibly making a bigger impact than January’s record-long government shutdown. Boeing's slowdown could affect total GDP output, export numbers and the Census Bureau's factory goods report on aircraft shipments, orders and related inventories, according to analysts at JPMorgan, per a recent Business Insider report.
How Boeing Crisis Could Weigh on U.S. Economy
(U.S. Economic Areas Possibly Affected)
- GDP Growth
- Factory production
Source: JPMorgan, per Business Insider
MAX Orders Make Up 80% of Boeing's Order Book
America’s largest jet maker has seen two of its 737 Max planes crash in just five months. While many 737 models are already sold, the crisis has led many of Boeing’s customers to rethink orders that they currently have on the books. Indonesia’s flagship airline has already moved to cancel a $5 billion order for 49 Boeing 737 Max 8 jets. The DOJ has reportedly subpoenaed Boeing under a criminal investigation, while Europe and Canada are investigating the deadly incidents themselves.
Lower sales for Boeing would weigh on its business, spelling bad news for the economy at large, warned Michael Feroli, JPMorgan's bank's chief US economist.
"The issues affecting Boeing's 737 MAX could begin impacting the economic data flow," wrote Feroli in a note to clients Friday. Boeing’s 737 Max plane is on track to become the best selling plane of all time, per Business Insider. That success could translate to an equally massive disaster for the company if it fails to address the issue quickly. The roughly 400 planes already in service worldwide have now been grounded, while Max jet orders currently make up 80% of Boeing’s current order book.
"If the issues are not resolved in a timely manner and production of the 737 MAX needs to be halted for a spell,” wrote the JPMorgan strategist. “It would take about 0.15% off the level of GDP, or about 0.6%-point off the quarterly annualized growth rate of GDP in the quarter in which production is stopped."
Shares of Boeing have fallen 15% over the past 30 days, with its decline sparked by the Ethiopian Airlines crash earlier this month. To combat the 737 Max issue, Boeing is beginning to incorporate a safety feature that it had previously charged customers extra for.
Additionally, Boeing could see its problems intensify if China, a major buyer of Boeing jets, cuts back on the $5 billion in sales it provides for the aerospace company. The jet maker is the only non-consumer, non-tech U.S. company which generates over $5 billion of revenue from China. As a result, Boeing was initially thought to be at great risk of a trade war between Washington and Beijing.
As trade tensions eased, investors cozied back up to Boeing. Yet the jet maker still faces potential headwinds in the region, per a recent Bloomberg column. First, the country is reportedly considering excluding the aircraft from a proposal to ramp up purchases of U.S. goods. Meanwhile, China is focused on establishing itself in the aerospace industry, as Comac gears up to roll out its C919 in 2021 to rival Boeing and European giant Airbus. Even if the Boeing orders make it into the trade deal, in the long-run, columnist Brooke Sutherland says the country will wean reliance off the duopoly.
Risks aside, JPMorgan expects GDP to be “largely unaffected for now” as a result of the Boeing crisis. It will however, affect the composition of GDP, grow inventories and decrease growth of business investment and gross exports, per the analyst. As for investors in the jet maker, until more clarity arrives, those who decide to hang on should carefully weigh their willingness to take on the risk. According to Barron’s, which spoke with Boeing, MAX engine maker General Electric Co. (GE), airlines, investors, industry consultants, Wall Street analysts, and many others, “no one knows anything” about the future of the 737 Max program, leaving much up in the air.