New York Fed says Boeing's production freeze could cut U.S. GDP growth by 20% in 2020
Analysts at the New York Fed expect the all-out production stoppage on Boeing's 737 MAX will have a sizable negative impact on U.S. growth this year.
State of play: The decline will produce a 0.4% decline in GDP growth, the NY Fed's Julian di Giovanni finds.
Why it matters: "This is a significant fall given an average quarterly GDP growth of 2 percent," di Giovanni writes in a recent Fed blog.
Background: Prior to the slowdown in production that began in 2019 after nearly 350 people died in two plane crashes, Boeing was producing roughly 52 of those models on average per month. It's assumed this number will be zero for the first quarter of 2020.
- Assuming workers' productive capacity, even if they are laid off, is zero, and suppliers are all domestic, di Giovanni applies Hulten’s theorem to the implied percentage change in sales from the 737 MAX production stoppage to calculate the total loss.
By the numbers: "Boeing averaged about $25 billion in quarterly revenue in 2018. Assuming that the average price of a Boeing 737 MAX is roughly $130 million, a pause in all production and sales implies lost revenue of $7 billion per month, or $21 billion for the first quarter of 2020."
- "This then implies a sales loss of roughly 84 percentage points relative to an average quarter in 2018."
- "Treating this sales loss as the firm shock, the lost GDP growth is then Boeing’s Domar weight times this loss (0.0047*–0.84 = –0.004), or a 0.4 percentage point decline in GDP growth."