Wary Wednesday – Boeing Production Halt Spells Big Trouble for Q1 GDP
I don't think people understand math.
Boeing (BA) Sells $25Bn worth of airplanes per quarter and spends about $20Bn to make them so that's 0.1% off the $4.7Tn quarterly GDP right there but their suppliers also spend money and we're not even considering the impact of the layoffs and the hit we're going to get to inventories – which is also a negative on GDP.Goldman Sachs(GS)estimates that an $18Bn reduction in inventory (not all BA planes are the Max) alone will knock 0.4% off Q1 GDP PLUS a good 0.1% from BA's lack of revenues (along with the chain of suppliers) so we're talking about a 0.5% reduction to a GDP number that was already projected to be barely above 1%.
Durable Goods and Manufacturing numbers will also take a huge hit so we're looking ahead to a string of bad reports – maybe even a bump in unemployment in the months ahead. We are constantly amazed by how shocked traders seem to be by news that we could see coming a mile away so I will tell you now – while it is still a mile away – to prepare yourself for the shock of your fellow traders – who are ignoring this coming storm just like they've ignored all other storms to hit the market in the past year.
Will this one matter? It's hard to say. There are plenty of people who go outside in lightning storms and very few are actually struck by lightning. That doesn't mean it's safe to go out in a lightning storm and those who don't go outside are never struck by lightning while those who do are only rarely struck by lightning. The people who stay inside are not foolish and the people who go outside are not really foolish either – as statistics are very much on their side.
Still, this is math and MATH is telling us that the Q1 GDP will be about 33% lower than the currently projected 1.5%, which means that no one seems to be taking into account the ACTUAL decision by Boeing to halt production through Q1. Nothing is going to change that – once they shut production, it takes 90 days to restart so we should be more worried about whether they decide to restart it soon (they are currently expecting to restart in April, pending approvals).
The effect of rising inventories is something I always complain about in GDP Reports as there's an underlying assumption that all inventory gets sold, which paints a false positive in the GDP Growth leading into recessions as everything seems fine while inventories pile up. That has very much been happening this year as 737Maxs have been produced but not delivered/sold so the risigng inventories have added to the GDP while actual shipments have fallen off considerably.
This can be a bit of a ticking time bomb because, what if, ultimately, the 737 Maxs are de-certified and it turns out BA wasted $50Bn making that inventory? Not likely but possible. That would be an economic disaster of biblical proportions, making being struck by lightning far preferable to what would happen to BA and the US economy under those circumstances.
900 companies make parts for the 737 Max and BA is the US's largest manufacturer and largest exporter but there is simply so much crap going on at the moment that no one is focused on this issue. 400 737 Max planes owned by airlines have been grounded for a year and 400 more 737 Max planes were produced by BA and are sitting in inventory. BA generally delivers 42 planes per month and, as you can imagine, delivering a plane is not a job that UPS, FDX or even Amazon are able to take care of for BA – it require very specialized carriers equipment and assembly teams as well as intake teams at the airline so BA can't simply deliver 400 planes once they are re-certified, I doubt they can even do 80 per month which means it will take an entire year just to deliver the inventory backlog once production re-starts.
Many of the hundreds of companies that are part of the 737 Max supply chain are likely, at a minimum, to be more circumspect with raises, capital investments and new hires for the foreseeable future, Dartmouth College economist Matthew Slaughter said, and that could have a broader effect on manufacturing as well as rail and trucking companies responsible for shipping the giant metal components. "This is going to be something that curtails activity in the broad US manufacturing sector," he said.
Because of the China deal, the Atlanta Fed RAISED their GDP forecast last week, ahead of the BA decision but surely they saw this coming? It will be interesting to see what they do with this new information but most analysts had GDP hovering around 1.7% so we'll watch out for changes in that forecast but the Philly Fed (tomorrow) and KC Fed (Friday) and also Friday's GDP Report take none of this into account – so a false sense of security can remain in place through the holidays.
But I wouldn't stand in the rain!