Is It Really a Soft Patch?
The idea that the soft patch (especially in manufacturing) could be due to one-off events, like the tsunami in Japan is bothering quite a few people.  A good question came from one of our loyal readers and we thought it was important to post the answer.  We remain convinced that the economy will accelerate in the second half of this year.

Customer Question:

Dear First Trust;

I'd like to believe you when you write "Never mind that much of the slowdown is so obviously tied to temporary Japan-related disruptions in manufacturing and tornado-related dips in home building." But where's the evidence of Japan's manufacturing and tornadoes negatively affecting the U.S. economy and/or GDP?  That correlation seems to be a bit of stretch.

Best,

Customer

First Trust Response:

Industrial production in Japan fell 15.5% in the month after the tsunami/nuclear disasters.  That's not an annual rate. 

US industrial production was unchanged in April but up at a 5.3% annual rate ex-autos.  In other words, no slowdown ex-autos. 

Housing starts fell 10.6% in April but were up 5.5% excluding the South, which was the hardest hit region for tornadoes. 

Customer Response:

Good morning First Trust,

I'm still not convinced - but would like to be.  So, how about using dollars; does this seem right to you?  If Japan's Industrial Production declined 15.5% in one month, then...
  • Japan's annual GDP = $5.5T
  • Japan's annual Industrial Production = 23% of their GDP, or $1.26T
  • Monthly Japanese monthly Industrial Production = 1/12 of $1.26T or $105.4B, apprx.
So, if Japan's Industrial Production declined by 15.5% in one month, that's a dollar decline of 15.5% x $105.4B = $16.3B. 

If $16.3B is correct, then this is rather small compared to our own GDP & Industrial production, don't you think?  So, it doesn't seem that the Japanese problems explain the "weaker than expected" US numbers.

Thanks for your patience,

Customer

First Trust Response:

Customer,

You need to annualize the monthly dollar amount to figure out the impact on our annualized growth rates.  In other words, the $16.3 billion monthly dip is close to $200 billion at an annual rate.

Another way to think about it is that the US produces about $270 billion per month in gross products (not annualized, to be consistent with your original $16.3 figure).  So now you should see the loss in Japan is roughly 6% of our production. Let's assume that only a fraction of this production is exported to the US. Even if that results in only a 0.3% drop in our production for a month, that's about a 3.5 percentage point change on an annualized basis.  

More importantly, it's not the raw $16.3 dollar amount that matters but the nature of what was disrupted.  The dollar value of your investing platform may only be a small share of the value you normally add, but if you can't make any trades, then your production goes way down, no?  We rely on Japan for key auto parts and if those don't show up, the impact on our production can be disproportionate to the shortfall in products from Japan.

First Trust Economics
Posted on Tuesday, June 7, 2011 @ 10:44 AM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.