The Boeing Effect
By Michael Englund
News about Boeing (BA ) prompted something of a double hit for the U.S. economy on July 27. First, the Chicago-based aerospace giant posted a solid second-quarter profit report -- and issued upward-earnings guidance for 2006. Then, June's government report on durable goods, issued the same day, showed another solid round of aircraft orders. Moreover, aircraft orders have seen a colossal, two-month surge, as gauged by both Boeing and the Commerce Dept.
And that leads us at Action Economics to the conclusion that the frenzy in the friendly skies may have an analogue on terra firma: In one key respect, the aircraft industry's scramble is not all that different from the heated activity that characterizes the housing market.
The aircraft boom has been nothing if not impressive. Aircraft orders reported by Boeing surged to 200 in May and were a still-remarkable 162 planes in June. That has been matched by a comparable upswing in the aircraft component of the non-defense durable goods orders data, to a phenomenal $15.5 billion in May. This was followed by an almost equally extraordinary $11.4 billion in June.
HIGHER, EVER HIGHER.
Both sets of measures are three or four times their trend levels, and early indications for July is that the explosion in aircraft orders shows no sign of abating. One-month jumps have been seen in the past, but this multi-month spike is off the charts.
The figures reflect an enormous two-month wave in unfilled orders as measured in the durable goods report for June. Unfilled orders have shown a nearly vertical surge over the past two months -- going from what had been a comfortable return to average levels as recently as April, to rising within hailing distance of a record high just two months later. By itself, a $6 billion order from Brazil, reported July 26, would push unfilled orders easily through the record, though other orders are piling up as well.
Boeing has conservatively boosted its forecast for aircraft assemblies in 2006 to 395 planes, from a 320 target for 2005. But we expect assemblies to reach at least 410 next year, paving the way for a 25% surge in shipments for this important industry in 2006 -- one that likely will be nearly repeated in 2007.
For the aerospace industry, it appears that the September 11 terrorist attacks instilled an overhang of caution on the ordering process for aircraft that lasted three years. But that reluctance has now resulted in an enormous delay in the ordering of planes needed to meet demand over the coming 10 years to 20 years.
As such, airlines and other operators are now scrambling to get their orders in so they won't face constraint bottlenecks as we approach the end of the current decade. The result? A frenzy in the global aircraft industry to buy before it's "too late."
If that sounds familiar, you're right. The aerospace industry froth is notably similar to the scramble underway to "get in" on real estate in pricey urban markets. Certainly, key differences exist. With housing, some economists have identified the process as a "price bubble," and no such pricing phenomenon is underway in aircraft.
But price may be less of a driving factor in the housing frenzy than people think. It's clear that the market remains red-hot, as the new-home sales data for June, also released July 27, indicate. But as we've said before, current real estate gains are not unprecedented (see BW Online, 06/22/05, "Housing Bubble -- or Bunk?"), and prior times of rising housing prices have lasted for prolonged periods, despite intuitive popular perceptions that prices are "too high."
WATCHING THE CLOCK.
The activity may be simply shifting to another segment of the market, as evidenced by pricing data from the most recent new-home and existing-home sales reports. Just as the full stock of homes, as gauged by existing-home sales, are showing strength in price appreciation, builders of new homes seem to be skewing their production toward lower-priced product. This is following a shift toward higher-priced homes in 2004. Perhaps talk of a housing bubble has led to desires by builders to focus on large numbers of "quick hits" in the lower end of the price spectrum, due to fear that the bubble will pop.
The public talks much about the "housing bubble" in the context of price, which doesn't apply to the aircraft market. But both of these markets are experiencing a bubble in activity all the same. In total, both are currently characterized by aggressive attempts by buyers to "lock in" purchases of long-term investments before it is "too late."
Both sectors are important components of the fixed-investment component of gross domestic product, and thus both should fuel rapid investment growth over the quarters and years ahead. It appears that key battles for U.S. economic growth are being won in the air -- and on the ground.
Englund is chief economist for Action Economics