Boeing and its Impact on the Economy
I was asked at a recent presentation what impact Boeing’s problems might have on the overall US economy. While it might be tempting to discount how much this might impact economic growth, one might rethink that perspective.
Airlines as well as other manufacturers have warned about slowing earnings because of the grounding of the 737 Max. With the company still uncertain when that plane will be certified to fly again, the economic impact continues to be felt throughout the transportation economy.
It is our view that US economic growth may be temporarily slowed by Boeing’s ongoing problems by as much as half of one percent. While that might not seem like a significant number, in reality it is. If the US economy grows at 2 ½% and then slows by half a percent, that’s a Boeing impact of almost a 20% reduction in GDP expansion.
A recent CNN article highlighted the potential impact of Boeing’s trouble on US GDP. In that article they stated:
“The company's sales are down because it doesn't get fully paid until planes are delivered, a negative for GDP growth. Yet at the same time, its inventories have been building, which is helpful for GDP growth. Aircraft production is measured first in the form of inventories in national accounts, and upon delivery account for a spike in sales, said Juneau and Meyer. "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," said Pearce.
Another factor that could hurt the economy is layoffs. Boeing has said it has no plans to cut staff because of the 737 Max. Workers will be reassigned to other jets and products, the company said. But there could be cutbacks among Boeing's supply chain, which could hurt consumer spending and weigh on economic growth.”
Source: December 19, 2019, CNN.com article by Anneken Tappe
Economic activity tends to operate in a connected fashion. One company’s troubles can create problems for other companies in the supply chain. These challenges may impact employment which could create headwinds for consumption.
The recent troubles in Asia have not helped Boeing’s fortunes as well. Emerging market growth (which accounted for a significant percentage of plane purchases) will likely be under pressure for the foreseeable future.
We continue to believe the economy in the United States will grow at a moderate basis, but headwinds are emerging. For that reason, we expect GDP growth this year to be lower than the last several years. Additionally, we expect inflation to remain muted which will impact interest rates. We believe rates will continue to be under pressure.
Our economic outlook helps drive our investment decisions as we manage portfolios. GDP growth is a key factor we assess on an ongoing basis as we make judgments. We will continue to do so as we manage portfolios.
If you have any questions about this information, please let us know. Always happy to help!