Boeing Production Cut Will Pare Half-Point from GDP, Says JPM Economist

Halting production on Boeing’s best-selling, if trouble-prone, airliner will lop 0.5 percentage points off US gross domestic product in next year’s first quarter, according to Michael Feroli, JP Morgan’s chief US economist.

The 737 Max was grounded in March after two fatal crashes, in Ethiopia and Indonesia, prompted widespread criticism of its automatic safety system, which apparently caused the twin catastrophes. The timeframe for the airliner’s return to service is unclear, but the company’s decision to pause production was made as a cost-savings move.

Boeing is the US’s largest goods exporter and the fourth largest stock in the Dow Jones Industrial Average. Since February, Boeing has lost 25% of its market value.

The impact on GDP in 2020’s first quarter will be the result of the output decline that the production pause will trigger, Feroli explained in a research note. “Accordingly, the expected drag on 1Q GDP growth should be concentrated in reduced inventory accumulation,” the economist wrote. He added that, once the MAX is cleared to fly, that slump should be offset by the new plane output.

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GDP growth for 2020’s first quarter should be 2.1%, the Conference Board estimates. If Feroli is right, then the period should see only a 1.6% expansion. The Conference Board projects 2.0% growth in the current fourth quarter.

Up until now, the aircraft maker had reduced production to 42 per month from 52, he added, which didn’t make much of a mark on economic statistics. Inventories of commercial aircraft and parts, a category that’s risen steadily over the past 15 years reached a record $78 billion in October, US Commerce Department statistics indicate. This has been a bright spot in amid a general shrinking in American manufacturing output.

The effect of the Boeing time-out is bound to ripple out from the aerospace giant to suppliers, such as General electric, which makes the MAX’s engines in a joint venture with France’s Safran.

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Tags: 737 Max, Boeing, GDP, JPMorgan Chase & Co., manufacturing, Michael Feroli

Illinois Gov. J.B. Pritzker signed a measure to consolidate 649 distinct public pension funds throughout the state in what he’s calling a “monumental accomplishment.”

The governor issued a task force earlier this year to study the benefits and feasibility of pulling off such a feat. The task force concluded that by remaining partitioned entities, the pensions were missing out on potential for investment opportunities and operational efficiencies.

“This [assembly] has achieved what none of their predecessors have been able to do: Consolidate 650 downstate and suburban pension funds into just two, amplifying their investment power, and reducing the burden on property taxpayers,” Pritzker said during a news conference coupled with the bill’s signing.

The task force conducted simulation runs of investment gains under a hypothetical consolidation, and found that together, the pensions would generate an additional $160 million to $288 million in investment returns, or 6.73% to 7.62%, a comfortable lead over a measured 5.61% over the same period.

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The funds collectively stand at 55% funded, with $11.5 billion in unfunded liabilities.

“Once the consolidation is completed, we’re going to be saving $160 million annually, which will allow that money to be better invested in the services of which the people of Illinois can rely on,” said state Sen. Cristina Castro.

Pritzker earlier this year denounced the idea of consolidating the downstate pensions into the state’s funds, citing that the state’s credit rating was already sitting just above junk status and was sensitive to being downgraded. Moody’s rates the city of Chicago at the Ba1 junk level due to uncertainty over the long-term affordability of its ballooning pension burdens.

“The greatest financial issue facing these systems is that the growth in liabilities has been consistently diverging from the growth in assets. … A fixed 90% funded level target date, market experiences vastly different from actuarial assumptions, and insufficient contributions into the system, have compressed remaining unfunded actuarial accrued liabilities into a shorter and shorter timeframe,” the task force said. “This has led to unsustainable growth in required employer contributions and has consistently increased the burden on state and local government operating revenues.”

“Decades of underperformance, high administrative expenses, and duplication demanded change. The status quo was unacceptable,” said William Brodsky, former chairman of the Chicago Board Options Exchange. “While there’s more to do, we strongly believe that these recommendations are a significant step in improving the performance of these funds and hence the funding of these many pension funds.”

The legislation garnered overwhelming bipartisan support from both chambers of the Illinois General Assembly. The average number of participants per plan is 67, with 24 plans having only one active participant. Only five plans have more than 500 active members.