More than meets the eye: Japan the Achilles’ heel of U.S. economy in Q2

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Much has been said and written about the inability of the Fed to sustain U.S. economic growth. In previous articles I have pointed out the massive impact of the Japanese earthquake disaster on the health of China’s manufacturing sector as measured by the seasonally adjusted CFLP PMI.

Sources: CFLP; Li & Fung; Markit; Plexus Asset Management.

But what impact did Japan’s twin disasters have on the U.S. economy?

I depicted Markit’s composite PMI for Japan against U.S. total imports from Japan, with the latter lagging by one month. It is evident that approximately USD4 billion in imports was shaved off in the first month after the disasters and a total of more than USD10 billion thus far.

Sources: FRED; Markit; Plexus Asset Management.

It is even more profound if the manufacturing PMI is used.

Sources: FRED; Markit; Plexus Asset Management.

Exports by the U.S. to Japan were hardly affected by the twin disasters, though.

Sources: FRED; Markit; Plexus Asset Management.

As a consequence of the twin disasters the U.S.’s trade deficit with Japan shrank by USD3.4 billion or 56% from March to June.

Sources: FRED; Markit; Plexus Asset Management.

Sources: FRED; Markit; Plexus Asset Management.

If I assume that the lower imports from Japan have not been replaced by other goods and services, the lower imports of USD10 billion plus amount to around 0.9% of total retail sales in the U.S. in the second quarter.

The impact of Japan’s disasters on U.S. retail sales is clearly evident in the following graph in which the month-on-month retail sales are depicted against Japan’s manufacturing PMI.

Sources: FRED; Markit; Dismal Scientist; Plexus Asset Management.

The impact is particularly evident in the sales of motor vehicles and parts.

Sources: FRED; Markit; Dismal Scientist; Plexus Asset Management.

Japan’s disasters also played out on the employment front. My calculated GDP-weighted ISM PMI employment index moved in line with Japan’s manufacturing PMI from March through June.

Sources: ISM; Markit; Dismal Scientist; Plexus Asset Management.

That had a major impact on the number of jobs created.

Sources: ISM; I-Net Bridge; Plexus Asset Management.

U.S. imports from Japan had a direct bearing on non-farm payroll employment.

Sources: FRED; I-Net Bridge; Plexus Asset Management.

That in turn impacted on retails sales too.

Sources: ISM; Dismal Scientist; Plexus Asset Management.

My conclusion is therefore that the fallout of Japan’s twin disasters is responsible for most of the disappointing economic data of the second quarter, whether it be GDP growth, employment  or retail sales.

A very interesting observation is that when the U.S.’s imports from Japan are compared to those of the same month a year ago, they track my calculated GDP-weighted ISM PMI (manufacturing and non-manufacturing combined). The PMI currently points to further weakness in U.S. imports in July compared to a year ago. No wonder Japan is so anxious to lower the external value of the yen!

Sources: ISM; FRED; Plexus Asset Management.

Now that the U.S. economy has got the Japan twin disasters behind it, with Japan recovering, it raises the question of whereto now. As you might have gathered from the graphs I have presented, the GDP-weighted ISM PMI employment index in July dropped while Japan’s PMIs headed higher. This is serious cause for concern. Was it as a result of the impasse on the U.S. debt issue or is the worsening situation in Europe catching up with the U.S.? Is that not what is behind the extreme volatilities in the markets? The U.S.’s economic statistics for July are likely to be awful but August’s manufacturing and non-manufacturing PMIs hold the key to further direction in financial markets.

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