Aftershocks: Prepare for the Slowdown

I’m back from the Higher Learning Commission conference in Chicago, which is why postings have been sparse.  I probably won’t get really back up to speed on postings for yet another few days because I’ve teaching, grading, and taxes to do.

In Japan, the aftershocks continue from the massive March 11 earthquake and tsunami.  The global economy is beginning to experience aftershocks from the triple disaster (quake-tsunami-nuclear meltdown) as well.  As readers might remember, I pointed out last month that the disaster would prove to be the first real large scale “stress test” of the concept of globalization in manufacturing.  The initial expectation of economists after the disaster was that it would prove a challenge and shock to the Japanese economy but that there really wouldn’t be much impact outside of Japan.  Now we are starting to see that this initial reaction was wrong.  We are starting to see aftershocks in the global economy.

The news for the last two weeks in the global auto industry has been about supply-chain interruptions and temporary plant closures. For example Forbes reports today on Toyota’s announcement:

Toyota Motor Corp. said today it is going to halt production in Europe for eight days due to parts supply shortages resulting from Marchs earthquake and tsunami.

The shutdowns will take place from April 21 to May 2.

Assembly plants in the U.K., France and Turkey will be impacted as well as engine manufacturing facilities in the U.K. and Poland.

The plants will then run at a limited capacity.

This is on top of earlier announcements of rolling temporary shutdowns at U.S. plants and the continued shutdown or slowed production at it’s Japan plants.  Other news reports today have Toyota advising U.S. dealers that there will likely be shortages of some models at showrooms this summer.  Other reports.

You can’t sell cars you don’t have and haven’t built.  And you can’t build cars without all the parts – less than 100% of the parts is just not enough. Phillipines, Japan, Turkey, France, U.S., Germany, Britain.  This is global. And it’s not just one company. It’s across the industry since most firms had all adopted the same globalized supply chain strategy built around single sources for key parts.

It’s also not just the auto industry. The Wall Street Journal reports how electronics manufacturers are being affected:

Over the weekend, the Nikkei reported that Sharp halted LCD panel production at its Kameyama plant in Mie Prefecture, western Japan, and at its Sakai plant in Osaka until after the Golden Week holiday season in early May. The paper cited disruptions to industrial gas supplies and said the company expects to secure more gas in about a month…

Sony said Friday it is suspending operations at its optical parts and IC cards plant in Miyagi prefecture in northeastern Japan, following a power outage caused by the biggest aftershock to hit the area late Thursday.

A Sony spokeswoman said the plant will resume operations as soon as the power supply has been restored.

“Electronics makers and auto makers are extremely sensitive to further damages as it is becoming increasingly unclear how soon companies can resume full production,” Watanabe said.

I think it’s safe now to say that Japanese earthquake-driven interruptions to supply chains are more than just a “risk” to the global economic performance. We should consider the interruptions and concomitant plant shutdowns as a factor currently slowing economic growth.  At this time, the big question is just how much they will slow growth and even potentially reduce employment.

As I’ve mentioned previously, I have no great (or little) econometric model that I use.  I just go on my intuition.  Right now, I’m thinking the supply chain interruptions reduce GDP growth in the U.S. in second and third quarter 2011 by maybe 0.2-0.3 percentage points.  That’s not much. And in normal times it could be easily absorbed.  But this is not normal times.  We only grew at 2.9% in 4Q 2010.  We won’t know 1Q 2011 growth for another two weeks, but estimates are running lower – in the 1.5 to 2.5% range.  We need growth above 4% if we are to make serious inroads on re-hiring the nearly 20 million unemployed people, so, yes, this hurts.

And, like all aftershocks, this one is not isolated. There’s other aftershocks starting to hit our economy. Aftershocks from misguided budget deals and misguided European monetary policy.  I’ll talk more about those as I get time. Unlike GE, I have to pay my taxes this weekend.

2 thoughts on “Aftershocks: Prepare for the Slowdown

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