Global Agenda: Economic recovery, RIP

Japan has been hit hard and has exported its woes around the world, reducing economic growth in the stronger economies.

Japan tsunami 521 (photo credit: Reuters)
Japan tsunami 521
(photo credit: Reuters)
The emergence of stagflation as the primary threat to the global economy was the theme of last week’s column. A stream of economic data this week, and especially Thursday, from around the world but especially from the US and Japan, seemed designed to confirm this idea – with one caveat. Whereas last week’s economic data were mostly about the “flation” part of the two-headed monster, as most countries published their monthly price indices between the 10th and 15th of the month, this week’s flavor was strongly “stag,” with a distinct recessionary tinge.
Let’s skip the latest data on the US housing market, because the miserable state of that key sector is not new, nor is there any expectation of improvement – so further evidence of all that is not very significant. In contrast to the disastrous housing sector, the star of the US economic recovery of the last two years has been the manufacturing sector. The string of bad news issuing forth from this sector therefore carries great weight.
The overall index of industrial production was unchanged in April and was revised downward for the previous months. The index had been expected to rise, but it was impacted by a sharp fall in output in the automobile industry; total motor-vehicle assemblies dropped from an annual rate of 9.0 million units in March to 7.9 million in April. However, even without the negative contribution of the auto sector, factory production eked out only a 0.2 percent rise in April, again less than expected.
The slump in the auto sector was a direct result of the disruption to the global supply chains in many sectors, but perhaps especially in autos, stemming from the Japanese earthquake and tsunami in March. The same factor turned up at Hewlett-Packard, which noted that its business was hit by Japan-sourced disruptions – and there will probably be many more such announcements.
But not everything can be blamed on the misfortunes of Japan. In the course of the week, two regional indices of manufacturing activity were published, both for East Coast regions – those of Philadelphia and of New York State – and hence not areas where the auto industry is an important player. Nevertheless, the “Empire State Manufacturing Survey” of business conditions in May fell 10 points to 11.9, almost halving its April level – and compared to expectations for a slight decline to about 20. New orders fell, but inventories rose, and the sub-index measuring prices paid climbed to 69.9, its highest level since mid-2008 (not coincidentally, the date of the last commodity price boom).
The relatively positive aspect of the New York State data was that they showed that manufacturing was still expanding, albeit at a much slower pace. The “Philly Index” – published on Thursday and relating to the region under the purview of the Philadelphia Federal Reserve Bank – reported a much sharper plunge that barely avoided pushing the index into negative territory.
But that was small comfort, given that the index had stood as high as 43.4 as recently as March, before slumping to 18.5 in April and then to 3.9 in May. Not surprisingly, this two-month drop was one of the sharpest in the history of this index and does not bode well for that region or for the manufacturing sector generally.
Interestingly, in both the New York and Philadelphia surveys, the employment sub-indices rose in May, showing that employment was continuing to expand – probably reflecting hiring decisions taken months earlier, but in sharp contrast to the direction of current shipments and new orders.
In Japan, of course, they can’t blame Japan for their problems – but they can and do blame the earthquake and tsunami. Despite the attempt to paint the multidisaster in Japan as an opportunity – because of the huge reconstruction boom that was supposedly going to take place – it was pretty obvious that at least the initial impact on the Japanese economy would be negative.
But the estimates of just how negative turned out to wildly optimistic – perhaps because of the web of denial and outright lies that the Japanese authorities kept spinning. This week, close on the heels of the belated admission that nuclear fuel rods in some of the stricken reactors were exposed and melted down within 24 hours of the March 11 earthquake, came the official GDP numbers for the first quarter.
These showed that the Japanese economy suffered a mini-collapse in March, which resulted in GDP for January- March plunging by 3.7% from the previous quarter (double the rate predicted by analysts) and confirmed the inability of economic models to handle “Black Swan” events. Japanese economists are now warning that the second quarter will also see a decline, as the impact of the March disasters spilled over into April and even may.
While most forecasters believe that Japan will rebound strongly in the second half of the year, what is certain is that Japan has been hit hard and has exported its woes around the world, reducing economic growth in the stronger economies and even, as in the case of American manufacturing, snuffing out the recovery that had been under way.