(What’s Left of) Our Economy: Boeing Woes Finally Smack (Otherwise Encouraging) Fed Manufacturing Data

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737 Max, aircraft, Boeing, China, China trade deal, Commerce Department, Fed, Federal Reserve, industrial production, inflation-adjusted output, manufacturing, manufacturing production, manufacturing recession, Phase One, recession, tariffs, Trump, {What's Left of) Our Economy

The Federal Reserve’s report on January industrial production is out, and it not only finally makes clear the impact on manufacturing output of Boeing’s safety woes. It also strongly suggests that whatever (mild) recession industry has experienced is now over.

I say “whatever (mild recession)….” because several official measures of manufacturing output indicate that no downturn took place at all. For example, the Commerce Department’s GDP-by-Industry data series (which gauge factory production on a quarterly basis, not a monthly basis like the Fed) shows that manufacturing’s real gross output (analogous to the Fed’s inflation-adjusted manufacturing output figures) has not declined for two consecutive quarters during the entire current economic recovery. At the same time, it has registered several two-quarter (and longer) stretches periods during which manufacturing by this measure of inflation-adjusted output fell cumulatively.

Commerce’s tables for real value-added (a measure of manufacturing production that tries to prevent counting the production of inputs both as such, and as parts, components, and materials of finished goods) do report that industry’s production dropped between the fourth quarter of 2018 and the first quarter of 2019, and between the first and second quarters of this year. Cumulatively, moreover, this production level was lower in the second quarter of this year than in the third quarter of 2018 – revealing that on this basis, manufacturing suffered a three-quarter downturn.

At the same time, according to this series, both by the consecutive quarters and the cumulative methodology, the manufacturing recession ended in the third quarter, when it topped both the second quarter level and the output figure for the third quarter of 2018.

And don’t forget: According to the Fed’s real manufacturing output figures, domestic industry’s price-adjusted production peaked in December, 2007 – i.e., it’s never pulled out of the slump that began with the Great Recession. Further, as I documented last month, the Fed’s data show that within this long manufacturing recession, several shorter recessions have begun and ended by the cumulative criterion.

So that’s some of context needed for the Fed finding that after-inflation U.S. manufacturing production fell by 0.09 percent in January. That represented its first sequential decline since October, and left year-on-year production down 0.72 percent. By that standard alone, therefore, manufacturing’s recession has continued.

At the same time, industry’s constant dollar production is up since last April – by 0.70 percent. It’s also up 0.34 percent since April, 2018 – the first full month when the Trump administration’s tariffs on steel and aluminum imports went into effect,  and signaled that the President’s tariffs-heavy approach to trade had begun in earnest.

But the Boeing effect also needs to be considered as well. January saw a nosedive in aircraft and parts production of 1.07 percent sequentially, due to the company’s December announcement that production of its flawed 737 Max model would be suspended. The drop-off was the sector’s biggest monthly decline since the nearly 24 percent plunge in recessionary September, 2008.

I’ve wondered whether Boeing’s troubles had already been dragging down manufacturing output – given the company’s huge domestic supply chain, and given that the 737s had been grounded or banned from national airspaces nearly worldwide since March. But today’s report leaves no doubt that their effects have shown up. Indeed, the Fed explicitly stated that “excluding the production of aircraft and parts, factory output advanced 0.3 percent” on month in January.

So without the Boeing effect, January manufacturing output would be up cumulatively since last February – by 1.09 percent, not by 0.70 percent. And the increase since the advent of the main Trump tariffs would have been 0.74 percent, not 0.34 percent. These figures certainly don’t reveal a manufacturing boom – or even close. But given that even after the Phase One trade deal was signed with China, tariffs on hundreds of billions of dollars worth of Chinese products remain in place (many of them levied against goods that are manufacturing inputs), they cast new doubt on how damaging the President’s trade war has been for domestic industry.

Boeing’s 737 Max crisis will end some day. But the company itself warned that it could last “several quarters” more. Moreover, Boeing’s troubles scarcely end with this ill-fated aircraft. In other words, the company’s woes will keep impacting both all U.S. manufacturing data for the foreseeable future. Therefore, it’s up to the nation’s economists and journalists (along with think tank hacks, no matter who’s funding them) to keep this in mind when judging the effect of the President’s trade wars and other economic policies. Let’s see how many can meet this challenge.

(What’s Left of) Our Economy: U.S. Manufacturing’s Not Only Decoupling from China

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737 Max, aircraft, Boeing, China, Commerce Department, decoupling, GDP-by-industry, manufacturing, output, Trade, Trade Deficits, {What's Left of) Our Economy

The Commerce Department’s GDP-by-Industry series is almost always overlooked by followers of the economy, and partly that’s the Commerce Department’s fault. Its updates are invariably a quarter behind, so it’s what analysts call a (seriously) lagging indicator that says relatively little about the more important question of what’s in store.

Nonetheless, even when they’re lagging, distinctive and detailed indicators can clarify long-term trends considerably, and that’s why I like GDP-by-Industry and track it so closely. Because it sheds lots of light on some of the most important economic and trade-related issues of the day – and especially on the impact of President Trump’s tariff-heavy policies. Specifically, the latest set of figures, which were issued January 9, reveal that during the Trump administration, the United States has continued to progress toward the worthy goal of reducing domestic manufacturing’s dependence on imports (and especially imports from increasingly hostile countries like China) for acceptable levels of growth. 

In other words, the People’s Republic isn’t the only country from which American manufacturing is decoupling. 

According to the new data, the latest year-on-quarter results show that between the third quarter of 2018 and the third quarter of 2019, U.S. manufacturing output (measured according to a gauge called gross value added) increased by 1.21 percent. That’s not much. But the manufacturing trade deficit during this period rose by only 2.55 percent. (Both figures are in pre-inflation dollars, because inflation-adjusted manufacturing trade figures aren’t available.)

Although this growth rate is lower than that achieved between the second quarter of 2018 and the second quarter of 2019 (2.03 percent), that figure was accompanied by a much faster increase in the manufacturing trade deficit (7.83 percent). The first quarter to first quarter results? Manufacturing production growth of 2.76 percent, and manufacturing trade deficit increase of 1.29 percent. That is, manufacturing output actually grew faster than the trade deficit. So from that standpoint, the third quarter result are disappointing.

They look even more disappointing when compared with the results from the first two years of the Trump administration. In 2017, manufacturing production also grew somewhat faster (3.99 percent) than the increase in manufacturing’s trade gap (3.16 percent), and in 2018, output grew much faster (6.23 percent to 3.96 percent).

These Trump presidency figures, in turn, have been much better than those reported for President Obama’s administration. Once the current economic recovery entered a normal phase (2011), the manufacturing trade deficit grew much faster than output ever year except for 2013.

So what’s the case for the latest third quarter 2018-third quarter 2019 figures representing continued progress? And why should anyone be happy with 1.21 percent annual manufacturing output growth no matter what’s happening on the trade deficit side?

Two answers suggest themselves. First, since the President began imposing tariffs in earnest (essentially, in April, 2018), importers have been “front-running” their purchases from abroad.  Their efforts to secure these deals before various sets of tariffs kicked in has produced several short-term distortions in the trade deficit in particular. Second, since the spring, Boeing’s safety woes have exerted a major drag both on domestic manufacturing output and on industry’s trade performance – since the aircraft giant has long been America’s leading exporting company.

Just one example of the difference Boeing has made: Between the third quarters of 2018 and 2019, the U.S. civilian aircraft trade surplus dropped from just under $10 billion to just under $6.5 billion. Civilian aircraft is of course the product category containing Boeing’s troubled 737 Max jet, and the plane was grounded worldwide, or banned from many national airspaces, starting in March.

The relationship between trade balances and production is never one-to-one, especially over relatively short time frames. And the matter becomes more complicated in sectors like aircraft, with its long lead times and generally large backlogs. But it’s difficult to believe that the 737 Max crisis and the narrowing of the aircraft trade surplus hasn’t impacted American civilian aircraft production and exports at all. (In fact, between those two quarters civilian aircraft exports, which are strongly related to output levels, sank by $2.75 billion, or nearly 22 percent.)

Moreover, for the purposes of comparing manufacturing output growth and the manufacturing’s trade deficit growth, the aircraft troubles are significant. Had the category’s trade performance simply remained the same between the third quarters of 2018 and 2019, the trade shortfall would have increased not by 2.55 percent, but 1.25 percent – less than half the rate. As result, during that period, manufacturing’s output (1.21 percent) and trade deficit would have grown at very nearly the same pace.

What does the future hold for this key ratio? On the one hand, civilian aircraft production is bound to decrease for the foreseeable future due to the 737 Max production halt announced by Boeing in mid-December. On the other, numerous signs indicate that industry overall has come out of the recession that dogged it for much of the last year and a half (and that by some output measures, never happened at all). Moreover, the Phase One trade deal signed by the United States and China last week could well reduce at least some of the tariff-related uncertainty that’s clearly slowed manufacturing-heavy capital spending decisions by American business in general, and certainly in manufacturing itself.

That looks like a modest case for domestic manufacturing continuing its longer term trend of becoming more self-sufficient while growing adequately – a development that makes major sense in a world that’s far more uncertain.

(What’s Left of) Our Economy: Is Manufacturing Employment Being Undercut by Boeing Along with Trade Wars?

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737 Max, aerospace, aircraft, aluminum, Boeing, China, Jobs, manufacturing, metals, metals tariffs, metals-using industries, steel, supply chain, tariffs, trade war, {What's Left of) Our Economy

One of the biggest questions raised by the new (lousy) manufacturing results of this morning’s monthly U.S. jobs report concerns whether industry’s dismal recent performance is being impacted more by President Trump’s tariff-heavy trade policies or by Boeing’s aircraft safety woes. The bulk of the evidence released this morning seems to point to the trade wars as the continuing main culprit, but also to some Boeing-related puzzles. 

Overall, the sector lost 12,000 jobs on month in December – its worst such result (excluding October, whose figures were distorted by the General Motors strike) since August, 2016’s 23,000 decrease).  Moreover, the year-end annual manufacturing jobs gain of 46,000 was the lowest such figure since 2016’s 7,000 loss.  (For comparison’s sake, 2018’s annual manufacturing employment increase of 264,000 was the best such result since 1997’s 304,000.  

The trade wars evidence for the recent deterioration comes in the form of comparisons between the major metals-using industries during the early months following the imposition of tariffs on steel and aluminum, and afterwards (when many Trump critics argue that the trade curbs’ impact began sinking in). As always, the impact of Mr. Trump’s levies on imports from China remain too diffused throughout the manufacturing sector – and too unevenly so – to be gauged reliably. For good measure, they’ve also been threatened and applied in a confusing, on-and-off manner, and the recent Phase One trade deal and announcement of follow-on negotiations looks unlikely to end much of the measurement uncertainty.

First, here are the data on employment changes in those metals-using sectors from April, 2018 (the first full month during which the tariffs were in effect) through last month. Figures for the U.S. private sector overall, manufacturing overall, and manufacturing’s durable goods super-sector (in which most of the main metals users are classified) are included for comparison’s sake. Keep in mind that the results for household appliances also reflect a separate set of tariffs for large household laundry machines that have been in place since February, 2018.

                                                  Old thru Nov      New thru Nov       Thru Dec

entire private sector:                +2.82 percent      +2.81 percent    +2.92 percent

overall manufacturing:            +1.83 percent      +1.84 percent    +1.75 percent

durable goods:                         +1.99 percent      +2.02 percent    +1.94 percent

fabricated metals products:     +1.51 percent       +1.45 percent   +0.96 percent

non-electrical machinery:       +1.26 percent       +1.56 percent   +1.37 percent

automotive vehicles & parts:   -0.45 percent        -0.73 percent    -0.81 percent

household appliances*:            not available        -5.84 percent     not available

aerospace products & parts*:  not available        +9.02 percent     not available

*data are one month behind

There’s no mistaking that net new hiring in the metals-using sectors has been slower than in the rest of manufacturing and the private sector. As is clear from the table below, that’s a substantial change from the early post-metals tariffs period (presented here as April, 2018 through December, 2018 and January, 2019), when most metals-users were leaders in boosting payrolls:

                                                                Thru December           Thru January

entire private sector:                                +1.36 percent            +1.60 percent

overall manufacturing:                            +1.39 percent            +1.49 percent

durable goods:                                         +1.72 percent            +1.97 percent

fabricated metals products:                     +1.57 percent            +1.78 percent

non-electrical machinery:                        +2.33 percent           +2.57 percent

automotive vehicles & parts:                   +1.07 percent           +1.15 percent

household appliances:                              -2.05 percent –           2.52 percent

aerospace products & parts:                    +5.47 percent           +5.87 percent

But what about the Boeing effect – which figures to be considerable given the major role played by the aircraft and aerospace giant not only in American industry but the entire economy? As the data below show, the impact of the company’s production slowdown and more recent suspension of the previously best-selling but flawed 737 Max model (not to mention worldwide groundings) is anything but clear-cut. Presented here are the job change figures for aircraft and related parts industries, along with the numbers for other major supplier industries and the usual comparison sectors for the eight months preceding and following the announcement of global 737 Max groundings last March. The latest available data for the aerospace-specific industries only go through November, so that’s the final month used for the entire table.

                                                 July, 2018 thru March           March thru Nov

entire private sector:                     +1.38 percent                    +1.03 percent

overall manufacturing:                 +0.98 percent                    +0.28 percent

durable goods:                              +1.17 percent                    +0.11 percent

fabricated metals products:          +0.89 percent                     -0.31 percent

non-electrical machinery:            +1.38 percent                     -1.16 percent

aerospace products & parts:        +4.34 percent                    +2.27 percent

aircraft:                                        +6.59 percent                    +2.09 percent

aircraft engines & engine parts:  +1.04 percent                    +3.67 percent

non-engine aircraft parts/equip: +3.06 percent                     +1.22 percent

The pattern seems to show employment slowdowns nearly across the board. But the two non-aerospace-specific supplier industries – fabricated metals and non-electrical machinery – saw net hiring increases turn into net hiring decreases. Moreover, in aircraft engines and engine parts, payroll improvements actually accelerated.

At least some of this apparent paradox might result from the November end date used here. Boeing didn’t decide to suspend outright production of the troubled model until December 16, and the decision won’t even go into effect until sometime this month. Indeed, the company initially announced that no layoffs were accompanying the halt, although significant workforce reduction plans were finally made public yesterday. In this vein, reports of actual supply chain employment effects didn’t begin appearing until mid-December. Moreover, it’s possible that employment pain has been felt by the non-aerospace-specific companies in Boeing’s vast domestic supply chain before it spread to the aerospace-related firms.

So the safest bottom line so far seems to be this: Contributors to manufacturing’s recent jobs slump might now include both trade war- and non trade war-related developments. And anyone singling out one or the other deserves considerable skepticism.

(What’s Left of) Our Economy: GM and Boeing Effects Still Affecting U.S. Manufacturing Output

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737 Max, aircraft, aluminum, Boeing, China, durable goods, Federal Reserve, General Motors General Motors strike, GM, inflation-adjusted output, manufacturing, manufacturing production, metals-using industries, steel, supply chain, tariffs, trade war, {What's Left of) Our Economy

Like its immediate predecessor, this morning’s Federal Reserve release on inflation-adjusted U.S. manufacturing output made clear how the recent strike at General Motors have grossly distorted the latest results, as well as how Boeing’s mounting 737 Max aircraft safety woes remain difficult to identify from these production statistics.

First, let’s look at the overall numbers. According to the Fed, constant dollar American manufacturing output in November jumped sequentially by 1.15 percent. That was the best such increase since October, 2017’s 1.36 percent, and quite the turnaround from October’s 0.70 percent monthly drop-off (which was revised slightly downward).

These figures still left domestic industry in a recession, but not much of one. Since July, 2018, its price-adjusted output is down by 0.14 percent.

But the big role of the GM strike’s end in November’s turnaround couldn’t be clearer. In October, combined U.S. combined vehicle and parts output sank by 5.98 percent after inflation from September’s total. That decline was considerably less than the 7.65 percent nosedive reported last month, but still the worst such performance since the 7.18 percent decrease in January.

Last month, however, thanks to the return of the striking workers, real automotive production skyrocketed by a whopping 12.45 percent – the best monthly performance since the 29.95 percent surge of July, 2009 – as the last recession (which was especially woeful for auto and parts makers) came to an end.

Another way to look at the automotive effect: Without the GM strike, October’s 0.70 percent overall manufacturing after-inflation production decrease would have been a much better (but by no means great) 0.28 percent decline. And without the GM strike’s end, the 1.15 percent jump in price-adjusted manufacturing output would have been only 0.25 percent.

But the impact of Boeing’s safety troubles is as unclear as those of the GM strike are obvious. In November, American aircraft and parts production rose another 0.40 percent on month in real terms. Moreover, since March (when governments around the world began grounding the 737 Max or banning it from their airspace), such production is only down a total of 0.34 percent. Since April (the first full data month since that March flood of bad news), it’s actually up by 2.32 percent.

Therefore, as has been the case recently, the aircraft sector as such has kept outgrowing many of the biggest industries making up its domestic supply chain (which extends way beyond finished parts and into the materials they’re made from). Here’s how these big supplier industries’ output has changed since April, with the overall manufacturing sector’s performance and that of the durable goods super-category in which most are found included for comparison’s sake:

overall manufacturing: +0.68 percent

durable goods: +1.25 percent

primary metals: -1.13 percent

fabricated metals products: -0.54 percent

machinery: +0.16 percent

The above results also indicate that at least some of the economy’s biggest metals-using industries still lack the relative production strength they displayed for the first several months after steel and aluminum tariffs were imposed in March, 2018. Here are their latest numbers from April (the first full data month affected by these levies) through November, also with the overall manufacturing and durable goods results included:

                                          Old Ape thru Oct    New Apr thru Oct    April thru Nov

overall manufacturing: –      0.54 percent            -0.81 percent         +0.33 percent

durables manufacturing:    -0.32 percent            -0.40 percent         +1.75 percent

fabricated metals prods:   +1.42 percent           +1.26 percent         +1.48 percent

machinery:                        -0.81 percent            -0.77 percent          -1.02 percent

automotive:                    -12.24 percent           -11.34 percent          -0.30 percent

major appliances:             -9.14 percent            -9.08 percent          -6.31 percent

aircraft and parts:            +3.59 percent           +4.37 percent         +4.79 percent

One interesting bright spot apparent from the above – a nice improvement for production of major appliances, a sector that’s been dealing since February, 2018 with an additional set of product-specific tariffs. But in machinery and fabricated metals products in particular, where output tends to be less volatile than it’s been in automotive and appliances, recent performance clearly has been worse than that from April, 2018 through, say, this past January:

                                                          April, 2018 through January

overall manufacturing:                               +1.07 percent

durables manufacturing:                            +1.74 percent

fabricated metals prods:                            +3.42 percent

machinery:                                                +3.69 percent

automotive:                                               -3.32 percent

major appliances:                                      -1.43 percent

aircraft and parts:                                     +4.19 percent

Will the new “Phase One” trade deal announced with China make it any easier to gauge the impact of tariffs on most of the imports heading to the United States from the PRC? That’s already been difficult enough, because Chinese products have been used so widely, and to such varying extents, as inputs for so many manufacturing industries). And chances are this challenge will become more difficult, given both that it’s far from clear when follow-on talks will begin; and given Treasury Secretary Steven Mnuchin’s suggestion that the next phase may consist of many different phases.

Surely adding to the complications will be the Boeing effect, which seems certain to start appearing more conspicuously in the data now that the company has announced that 737 Max production will be suspended starting next month, as well as its failure to say how long the halt will last.

So just about all that can be said for sure is that domestic manufacturing had a good month in November – however unclear it remains whether this improvement has legs.

(What’s Left of) Our Economy: Trade Wars’ Impact on U.S. Manufacturing Output Still Clouded by GM and Boeing

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737 Max, aircraft, aluminum tariffs, automotive, Boeing, Fed, Federal Reserve, General Motors, General Motors strike, GM, household appliances, inflation-adjusted growth, inflation-adjusted output, manufacturing, metals-using industries, safety, steel tariffs, supply chain, tariffs, Trade, trade wars, {What's Left of) Our Economy

If you read last month’s Federal Reserve report on after-inflation U.S. manufacturing output (for September), then there wasn’t much reason to read yesterday morning’s report on after-inflation manufacturing production (for October). For it described the same puzzling picture: American industrial performance clearly dragged down by the recently ended strike at General Motors (GM), but apparently completely unaffected by Boeing safety woes that have sharply reduced the aviation giant’s enormous exports.

The top-line figures released by the Fed were definitely gloomy. Last month, real U.S. Manufacturing output dropped by 0.62 percent sequentially – the worst such result since April’s 0.87 percent fall-off. Inflation-adjusted motor vehicle and parts output, however, plunged by 7.65 percent – its worst such performance since the 7.97 percent nosedive of April, 2011. Moreover, September’s previously reported 4.22 percent monthly automotive price-adjusted automotive decrease was revised all the way down to a 5.49 percent slump.

As the Fed observed, without the huge October monthly plunge in inflation-adjusted automotive output, the overall manufacturing production decline would have been just 0.14 percent – which obviously doesn’t show any strength, either.

But this is where the Boeing puzzle comes in. There’s still no sign of it in these Fed data. Most curiously, constant dollar production for aircraft and parts production rose a solid 0.57 percent on month in October. It’s down since March, when governments the world over began grounding its popular but now troubled 737 Max jet or banning it from their national air spaces.

But although Boeing’s exports have deteriorated sharply, too, the real output shrinkage has only been 1.48 percent since March, and since April (the first full data month since those March woes), after-inflation production of aircraft and parts has actually risen 1.15 percent. That’s considerably better than the output performance of domestic manufacturing as a whole during this period. And it’s much better than the output of key supplier sectors, although surely they’d been affected by the GM strike as well:

overall manufacturing: -0.19 percent

durable goods: -0.81 percent

primary metals: -1.62 percent

fabricated metals products: -0.60 percent

machinery: +0.37 percent 

It’s true that export sales and production don’t move in lock step for aircraft, or for any other industry.  But with foreign markets representing well over half of Boeing’s revenue last year, the former sinking while the latter keep growing isn’t easy to explain.

Something else that needs to be considered: Whatever the Fed data actually show, they’re not able to show much about how aircraft parts and production would have fared without the Boeing troubles. And they’re even less capable of showing such counterfactuals regarding how supplier sectors might have fared.

As for the impact of the trade wars, as usual, the consequences of the President’s tariffs on aluminum and steel are easiest to gauge, since they’ve been on the longest, and the major metals-using industries (the presumed leading victims) are so easy to identify. The table below represents the changes in their real output since April, 2018 (the first full month in which the levies were in effect), with the data for manufacturing overall used as a control group, and durable goods included because it’s the super-category in which most of the main metals-using industries are located:

                                          Old Apr thru Sept    New Apr thru Sept    Apr thru Oct

overall manufacturing:       +0.09 percent            +0.08 percent         -0.54 percent

durables manufacturing:    +1.25 percent            +0.87 percent         -0.32 percent

fabricated metals prods:    +1.85 percent             +1.63 percent        +1.42 percent

machinery:                            0 percent                 -0.96 percent         -0.81 percent

automotive:                        -3.92 percent             -5.53 percent       -12.24 percent

major appliances:               -2.19 percent            -2.03 percent          -9.14 percent

aircraft and parts:              +5.43 percent           +3.00 percent         +3.59 percent

In absolute terms, the results are still all over the place, and a GM strike effect is clearly evident for supplier industries like fabricated metal products and machinery. The interruption of GM production also seems to have aggravated – but not caused – the loss of relative momentum exhibited by the metals-users – meaning, that their production slowdown has gotten faster relative to that of overall manufacturing, even leaving out the cratering of automotive output. Interestingly, that momentum loss is now affecting aircraft and parts, too – whose September production figures were also revised down significantly.

Also noteworthy – the steep monthly production dive in major appliances in October. Yes, they’ve experienced their own product-specific tariffs (on large household laundry equipment) as well as the metals tariffs. Production of these products is pretty volatile, too. But the 7.26 percent real monthly output drop was the biggest since it plummeted 8.29 percent between September and October, 2013. Even stranger – the housing sector, which drives much appliance buying and therefore indirectly production – registered a major uptick in growth in the third quarter after six quarters of substantial decline.

As for the impact of the China tariffs on manufacturing output, since that’s much more difficult to gauge than the effects of the metals tariffs (e.g., because Chinese products have been used so widely, and to such varying extents, as inputs for so many manufacturing industries) it seems to make less sense than ever to examine them, given the possibility of the Boeing effect lasting months more.

And somewhat depressingly, I find myself wondering if that’s going to be true for following any manufacturing-and-trade-relevant data for at least a month or two more. (Though I’m sure I’ll keep soldering on!)

(What’s Left of) Our Economy: A Boeing Drag on US Manufacturing Unrelated to Trump’s Trade War

Tags

737 Max, aerospace, aviation, Boeing, exports, manufacturing, manufacturing recession, safety, tariffs, Trade, trade wars, {What's Left of) Our Economy

Ever since Boeing ran into safety problems that early this year resulting in the widespread grounding of one of its most successful airliners, authoritative (as opposed to anecdotal) signs have been elusive that the aerospace giant’s woes have been contributing to the slowdown being experienced by domestic manufacturing. This matter matters because a sizable Boeing Factor would rebut claims that President Trump’s tariff-heavy trade policies deserve nearly all the blame for industry’s recent troubles.

Boeing’s commercial jets, after all, haven’t been subjected to any retaliatory duties from tariff-ed foreign economies – largely because the company is half of a practical duopoly (along with Europe’s Airbus) in large passenger aircraft production. As a result, no countries (including China) want to be left with a single supplier. (Possible European responses to American levies on Airbus products authorized by a U.S. win at the World Trade Organization in a trade dispute long predating Mr. Trump’s inauguration could change that situation.)

Moreover, Boeing uses enormous amounts of manufactured intermediates to assemble its planes (which also include military aircraft), and especially durable goods ranging from fabricated metals products to machine tools. So hard times for Boeing will clearly mean hard times for all these suppliers if they haven’t already.

Last Thursday, however, a Boeing Factor finally became clear in official U.S. economic data – specifically in the monthly trade report (which contained figures through August). These statistics reveal that U.S. exports of civilian aircraft began falling sharply on a year-to-date basis beginning in May – just two months after national aviation authorities and airlines around the world began grounding the 737 Max 8 model or banning it from their airspaces.

Skeptics could still contend that a tariff-induced slump in global economic activity has reduced demand for Boeing’s jets, but the trade data also show significant strengthening of civilian aircraft imports, meaning that, at least in the United States, demand remains healthy.

The most important comparison entails the April-through-August results for civil aircraft exports and imports over the last few years. These ensure the best apples-to-apples findings over respectable periods of time.

According to the trade statistics, the U.S. civil aircraft industry dominated by Boeing hasn’t been killing it recently. From April-through-August, 2017 to April-through-August, 2018, its exports declined by 13.94 percent. And then between the same 2018-19 stretch, the rate of deterioration sped up markedly – to 24.51 percent.

Meanwhile, imports of civil aircraft performed a u-turn. From April-through-August 2017 to April-through-August, 2018, they fell by 7.95 percent. But then between the same 2018-19 period, they actually rose – and by a strong 18.37 percent.

Also pointing to a Boeing/civil aircraft-specific problem – the major difference between civil aircraft’s trade performance in recent years and that of domestic manufacturing as a whole. Between the April-through-August 2017 and 2018 periods, while civil aircraft exports were dropping, overall manufacturing exports rose by 6.76 percent. Between the following April-through-August periods, both kinds of exports decreased, but overall manufacturing exports were down only 3.44 percent versus aircraft’s 24.51 percent. And while civilian aircraft imports were surging, overall manufacturing imports edged up only 0.60 percent.

Could this great recent disparity between civil aircraft’s trade performance and overall manufacturing’s trade performance caused the manufacturing slowdown all by itself? Probably not. Current figures aren’t available for civil aircraft as such, much less for aircraft-specific supply chain output. But a 2016 study from the Federal Aviation Administration reported that in 2014, civilian aircraft and parts manufacturing totaled a little more than $100 billion (in 2012 dollars), and that inputs from the supply chain brought the figure up to just under $258 billion.

Since the Commerce Department pegged total American manufacturing output that year at just under $6 trillion (in those same 2012 dollars), civil aircraft production would have represented 4.27 percent of domestic industry’s total. It’s true that that share isn’t overwhelming. But given that the Federal Reserve’s (inflation-adjusted) manufacturing data show that the sector’s after-inflation output has edged down from only +0.90 percent to +0.89 percent between the April-through-August 2018 and 2019 stretches, civil aircraft’s seriously worsening trade situation may bear noteworthy responsibility. And it certainly could be behind a comparable share of the slight (just 0.36 percent) real output decline over the past year that represents manufacturing’s latest technical recession.

A big complication could still put the spotlight back on the trade wars: Although safety problems have plainly hurt Boeing orders and production, and therefore new business throughout its supply chain, civil aircraft production and sales both feature long time lags between orders and deliveries. Indeed, the company says that its backlog is still considerable – and growing.

Nonetheless, it’s also true that the company’s progress toward regaining its reputation has lagged far behind its initial predictions, and new problems keep emerging with the 737s and other planes . In addition, a leading aerospace industry consultancy reported in August that Boeing-related concerns were depressing civil aircraft production globally. And within Boeing, the damage hasn’t been confined to 737 Max production. The safety crisis is affecting output of other airliners, too.

Moreover, other non-trade-related problems obviously have been weighing lately on U.S.-based manufacturing, too – notably the confusion in Europe created by the ongoing Brexit mess and the long-time abject failures of the European Union and Japan to generate respectable growth. For now, there’s little evidence that Mr. Trump’s trade policies have been a net plus for domestic industry (although the counter-factual needs to be mulled, too – i.e., how would manufacturing be faring under a pre-Trump policy regime?). But the same, at very best, can be said for the Boeing Factor.