Japan, the Achilles' Heel of US economy in second quarter

Much has been said and written about the Fed’s inability to sustain US economic growth. “Although the massive impact of Japan’s twin disasters on the health of China’s manufacturing sector is clearly evident in indicators of this sector, what is less obvious is the effect this has had on the US economy,” says Dr Prieur Du Plessis, chairman of Plexus Asset Management.

Du Plessis says that according to their research it is evident that approximately US$4 billion in imports, especially those of manufactured goods, was shaved off in the first month after the disasters and a total of more than US$10 billion to date. According to Du Plessis, US exports to Japan were hardly affected by the twin disasters and the US’s trade deficit with Japan shrank by US$3,4 billion or 56% from March to June.

“If we assume the lower imports from Japan have not been replaced by other goods and services, the lower imports of US$10 billion plus amount to around 0,9% of total retail sales in the US in the second quarter. The impact of Japan’s disasters on US retail sales is evident in the accompanying Graph A in which the month-on-month retail sales are depicted against Japan’s manufacturing Purchasing Managers Index (PMI). The impact is also particularly evident in the sales of motor vehicles and parts,” says Du Plessis.

According to Du Plessis, Japan’s disasters also played out on the employment front. “US employment indicators fell in line with the significant pullback in Japan’s manufacturing sector in March and April. That severely hampered the number of jobs created from April through June this year, as is clearly evident in Graph B in which non-farm payroll employment is depicted against US imports from Japan. That in turn impacted negatively on retail sales.”

“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,” says Du Plessis.

He believes the outlook for US imports from Japan in the coming months is not at all rosy. “My indicators for both the manufacturing and services sectors of the US economy currently point to further weakness in US imports from Japan compared to a year ago. No wonder Japan is anxious to lower the external value of the yen.”

Now that the US economy has the Japanese twin disasters behind it, with Japan recovering, it raises the question of ‘where to now?’. According to Du Plessis, the US employment indicators dropped in July while Japan’s purchasing managers indices headed higher (see accompanying Graph C).

“This is serious cause for concern. Was it as a result of the impasse on the US debt issue or is the worsening situation in Europe catching up with the US? Is that not what is behind the extreme volatilities in the markets?” Du Plessis believes the US’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.

“While the markets are very much poised on a knife’s edge, and we could see further downside, I believe US equities are presenting a good buying opportunity for long-term investors who are prepared to stomach volatility,” he concludes.

Graph A

The impact of Japan’s disasters on US retail sales is evident as the month-on-month retail sales are depicted against Japan’s manufacturing Purchasing Managers Index (PMI).  

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

Graph B

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

Graph C

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