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NAW News

ECONOMIC UPDATE

- March 2011

The Japan Disaster

By Alan Beaulieu, an NAW Senior Economic Adviser, and President of the Institute for Trend Research; and
Brian Beaulieu, CEO and Principal of the Institute for Trend Research  

Alan Beaulieu Brian Beaulieu
Alan Beaulieu Brian Beaulieu

The natural disasters that have hit Japan and the resulting human tragedy are immense and our thoughts go out to the people of Japan.

It is our conclusion that as bad as the situation is in Japan to date, we do not need to revise our outlook for the U.S. economy and probably most of Asia; Japan being a probable exception.

The question we must deal with is what will be the likely economic impact from the events that have transpired? Will the devastation put Japan in a recession? Will the devastation put the United States and/or other parts of the world in a recession?

There is certainly the potential for Japan to slip into a recession. However, Japan was already on the backside of the current business cycle, slowing in its ascent from a year-over-year gain of 14.4% in early 2011 to what we were projecting would be a 1.2% gain for 2011.

Events of the scope that impacted Japan have the ability to exacerbate trends, but are unlikely to cause trends over anything but a short-term horizon (less than one year). The fact that Japan was already weakening, means that the downside of the business cycle will likely gather negative momentum over the next several quarters. Beyond that, Japan is going to be investing billions of yen in rebuilding efforts. Billions of yen will be spent that otherwise were not likely to be spent, at least not by the government. There will certainly be economic winners in Japan because of this, just as there will be economic losers. On balance, how far Japan comes in for 2011 below (if any) our original +1.2% projection will be a measure of how quickly and effectively the government moves (speed and size matter) and the resiliency of the culture.

Of course we all remember 9/11. How about Hurricane Katrina? They were both devastating events with severe consequences, but neither was sufficiently large to derail demand. Demand is the crux of the issue, especially when considering the beyond-Japan economic consequences of the earthquake. Will the events in Japan curtail demand elsewhere? We are doubtful it will, because Japan is a net supplier to the world, not a net consumer.

Some people are worried about runaway commodity prices, others have the opposite fear. The fears of a dramatic slowdown in the global economy have caused many prices to slump. We believe this will be temporary. However, a rapid reversal to skyrocketing commodity prices also seems unlikely in the immediate short term, since it takes time for the demand pull of a massive rebuild to create shortages.

At this writing, about a week after the earthquake and tsunami, we have seen the Japanese stock market decline by 11.3%. The U.S stock market is down about 3.8% from the end of February. While noteworthy, these changes are not cataclysmic, not without precedent, and not a cause for undue alarm. Panic selling is usually most forceful at the beginning of a crisis, so it is still early in terms of seeing how the U.S. market ultimately will shake out.

We have seen bond yields go down about 20 basis points in the United States, again noteworthy but not a sign of panic. Given the scope of the damage in Japan and the haunting implications for nuclear power plants, we wouldn’t want to be floating a utility bond for funding a new plant any place in the world. However, we aren’t seeing a flight to “safety” in the U.S. dollar, which we would expect to see if an economic Armageddon were imminent in the eyes of the bond market.

The first ITR® Management Objectives to be had from this discourse is this: The underlying health and momentum of the United States and most of the rest of the world is positive enough to carry the day, so stay in the mode of seeking new opportunities and being able to pounce on those opportunities. It would be a mistake to assume a bunker mentality at this time. The U.S. consumer is going to continue to consume, which is the long and the short of the issue at this time.