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Boeing, amid crisis, is making a move that could hurt the economy

Aarthi Swaminathan
Finance Writer

This post was updated.

When the production lines slow down, you’ve got a problem.

A note from J.P. Morgan last month argued that if production on Boeing’s 737 Max 8 model was halted, it could hurt U.S. GDP as much as 0.15%.

And after close on Friday, Boeing stated that the aerospace giant will pause deliveries and cut production of the popular aircraft model by about 20%.

The news put the stock under pressure on Monday, with BA settling down at 4.42% at the close on Monday. Boeing accounts for 10.9% of the Dow Jones Industrial Average.

Boeing was down 4.42% at the end of Monday's trading session (Chart: Yahoo Finance).

“As we continue to work through these steps, we’re adjusting the 737 production system temporarily to accommodate the pause in MAX deliveries, allowing us to prioritize additional resources to focus on software certification and returning the MAX to flight,” the Boeing statement said. “We have decided to temporarily move from a production rate of 52 airplanes per month to 42 airplanes per month starting in mid-April.”

Southwest Airlines Boeing 737 MAX aircraft are parked on the tarmac after being grounded, at the Southern California Logistics Airport in Victorville, California on March 28, 2019. (Photo: Mark RALSTON / AFP) (Photo credit should read MARK RALSTON/AFP/Getty Images)

That could have implications for the economy, J.P. Morgan analysts previously warned.

“This is not a trivial part of the economy, the production of the 737,” J.P. Morgan Chief U.S. Economist Michael Feroli told Yahoo Finance’s On the Move on March 21. “First thing to keep in mind though, is that production is continuing... that means more of GDP is going inventories rather than being counted as investments or exports — so it could affect the trade balance.”

But if “it becomes more of an issue... if at some point, they would have to stop production... and that would mean in a quarter in which production stopped you could see GDP growth rates decline by over half percent.”

In the note, he also specified that a hit to production would also “take about 0.15% off the level of GDP.”


‘Pending the completion of the investigation‘

The aviation giant is currently facing multiple probes from government regulators after its 737 Max 8 was involved in two fatal crashes since October. The planes are grounded across the world, but production continues for now.

“Boeing is continuing to produce the plane, with most, if not all of the final product, being put into inventory pending the completion of the investigation,” J.P. Morgan analysts wrote. “In principle, this means that GDP should be largely unaffected for now, as weaker exports and business investment would be offset by more stockbuilding.”

The issue arises if Boeing is forced to stop the assembly lines, which would mean no sales and no inventory being built up.

A Boeing 737 MAX 8 being built for Shanghai Airlines sits parked at Boeing Co.'s Renton Assembly Plant, Monday, March 11, 2019, in Renton, Wash. (Photo credit: AP/Ted S. Warren)

How they got that number

To estimate the 0.15% hit on GDP, the analysts tallied the total value of planes that Boeing and other domestic aerospace manufacturers shipped and found the number to be about $130 billion in 2018.

They then projected this year’s sales of the 737 to be around $35 billion, “with about 90% accounted for by the MAX model, or about one-quarter of total domestic aircraft production.”

That $35 billion of sales “includes parts suppliers, not just the value added by Boeing,” they added, which gave them a “reasonably accurate approximation of the GDP impact of the 737 MAX for this year” to be 0.15%.

A look at Boeing 737 MAX 8 aircraft by country. (Graphic: Reuters)

Aarthi is a writer for Yahoo Finance. Follow her on Twitter @aarthiswami.

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