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Transportation sector blues

| January 31, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Production in the transportation sector put a drag on overall economic growth in 2019, particularly in the fourth quarter. Trouble at Boeing started early in the year, and then a strike at GM hit from mid-September through most of October. GM ramped up output in November and December but not by enough to fully offset the 6-week hiatus. Still, there is reason to hope that the headwinds will reverse over the course of 2020, especially in the auto market. Boeing is harder to predict.

Boeing 737 MAX

Boeing touted its 737 MAX as the successor to its small 737 workhorse.  MAX deliveries ran at a pretty brisk pace until a second deadly crash in early 2019 led regulators to ground the plane worldwide.  Boeing halted deliveries of the plane but continued to crank them out at its factory, albeit at a reduced pace. The idea was that as soon as regulators signed off on a return to service, Boeing could deliver all of the planes it had stockpiled for clients.  Unfortunately, Boeing has failed to satisfy the FAA or other regulators and still appears months away from getting the MAX back in the air.  With its storage facilities full and no deliveries imminent, Boeing finally took the step that it had avoided throughout 2019: it shut down the MAX assembly line altogether in early 2020.

The latest narrative from Boeing and the FAA is that the MAX could be re-certified sometime around mid-2020, though airlines are already preparing to carry on without the planes through the summer.

GDP Details

To put the MAX economic impact in context, Boeing delivered 256 MAX planes in 2018 at an average list price of around $120 million.  That works out to about $30 billion at list prices. Planes typically sell well below sticker price, so the true number might be close to $20 or $25 billion.  In contrast, in 2019, MAX deliveries stopped after Q1, leaving only 57 deliveries last year at roughly a $7 billion list price.

The GDP figures broadly line up with those numbers.  Business investment in aircraft equipment, including domestic customers of Boeing and other U.S. plane makers, averaged $30 billion per quarter in 2019 in real terms, down by $14 billion from 2018.  Aircraft exports, includingforeign customers of Boeing and other U.S. plane makers, averaged $105 billion in 2019, down by $7 billion from 2018.  So, overall deliveries of aircraft dropped in 2019 by about $21 billion, not far from the rough numbers suggested by the MAX delivery count.

Note that Boeing kept assembling MAX aircraft last year even after stopping deliveries were halted.  Manufacturers’ inventories of transportation equipment excluding motor vehicles, a category consisting mostly but not entirely of aircraft, rose at a $15 billion pace last year offsetting most of the drag from the drop in deliveries.

In the end, Boeing’s woes likely took no more than a tenth or two off of real GDP growth in 2019, and, as it turns out, aircraft production actually picked up somewhat from the third to the fourth quarter.

GM Strike

The GM strike had a much more concentrated impact from a timing perspective.  The strike began in mid-September and ended in late October.  GM managed to ramp up production in the summer in anticipation of a work stoppage, so motor vehicle production actually surged in the third quarter.  Once the strike ended, GM scheduled a steep ramp-up in assemblies but was unable by the end of the year to fully replenish dealers’ showrooms.  Motor vehicle output in Q4 essentially reversed the Q3 jump.

As it turns out, retail auto sales, the piece that shows up in the consumer spending category of GDP, changed little in Q3 and Q4.  Rather, most of the swings in production showed up in inventories. Stocks of new motor vehicles rose by $10 billion in Q3 and plunged by $32 billion in Q4, accounting for roughly half of the overall drag from inventories in Q4. All in all, the motor vehicle sector added 0.8 percentage points to growth in Q3 and subtracted 0.9 percentage points in Q4.

Looking ahead

Handicapping the immediate future for the auto sector is a lot easier than guessing the timing of a recovery at Boeing.  Auto assembly schedules for Q1 currently call for a noticeable pick-up, essentially a return to normal after Q4’s depressed pace.  Motor vehicle output stands to add close to 0.6 or 0.7 percentage points to real GDP growth in Q1, most of which will likely show up as a replenishment of inventories.  After that, motor vehicle output should return to being tied to the underlying pace of demand, presumably with much smaller marginal impacts on the overall quarterly growth figures.

Meanwhile, Boeing’s impact on the economy is likely to be more negative in Q1.  Boeing announced in December that it would halt its MAX assembly line starting in January.  If the factory remains shuttered for the entire first quarter, then the GDP impact is probably somewhere in the neighborhood of $20 billion annualized.  A complete shutdown for a full quarter would be worth as much as 0.4 percentage points on real GDP growth.  If, in fact, MAX production falls all the way to zero in Q1, then, by definition, it has nowhere to go but up.  So, the drag would end, with a rebound occurring whenever Boeing restarts the assembly line.

Even so, the 0.4 percentage point estimate is probably a little high, because Boeing is redeploying workers from the MAX factory to other locations, and it may be able to accelerate output of other plane models while the MAX plant is shuttered. The boost to other plants trims the Q1 drag to closer to 0.3 percentage points.

If Boeing produces no MAX planes in the first half of the year and then restarts the assembly line at a normal pace on July 1, then the profile for the year in terms of GDP growth impact from Boeing would be something like -0.3 percentage points in Q1, 0 in Q2, +0.5 percentage points in Q3, and 0 in Q4.  Layering the Q1 GM effects on top of that profile, the transportation sector could add modestly to growth in Q1, have no effect in the spring, and then boost the economy by around 0.5 percentage points in Q3 or whenever Boeing gets the green light to deliver new MAX planes.

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