Weekly Industry Crib Sheet: Devastation in Japan to Have Far-Reaching Effects

Plus: U.S. Trade Deficit Widens and Wholesale Inventories Grow.



Disasters in Japan to Hit Economy Hard
Late last week, a massive magnitude-9.0 earthquake off the coast of Japan moved the main island of Japan by 8 ft., shifted the Earth on its axis and triggered a tsunami that damaged much of the country’s coastline. The pulverized coast has been hit by hundreds of aftershocks since. As of this morning, 2,800 people are confirmed dead, 1,900 injured and more than 1,400 missing. Although Japan’s strict building codes presumably helped limit the damage and saved more lives from being lost, it is feared that the death toll could climb above 10,000.

“The disaster may curb Japan’s recovery from an economic slump in the fourth quarter as Prime Minister Naoto Kan struggles to convince investors about his ability to tackle the world’s largest public-debt burden,” Bloomberg News suggests. Brendan Brown, chief economist at Mitsubishi UFJ Securities International in London, tells Bloomberg, “The nagging question in the background here, given that public finances are in such a weak condition already, is: Is this going to push Japan over the edge?”

The Wall Street Journal (subscription required) reports that Japan’s industrial sector is in disarray, even where manufacturing plants are not directly affected by the earthquake and tsunami, while closings of car and chip factories threaten to disrupt the global supply chain. According to the Journal, plants that manufacture engines and other components for vehicles are either shut down or so disrupted that they might as well be shuttered.

Other plants that reportedly closed include oil refineries, paper-making facilities, steel companies and consumer-electronics plants. (For some products, such as Toyota Motor Corp.’s Prius hybrid, Japan is the only source.) Manufacturers also face rolling blackouts that could disrupt their power supplies for weeks. Multiple nuclear plants in Japan have experienced significant problems as cooling systems have failed.

Some companies have no idea when they will be able to resume production, in part the full scale of damage to the country’s infrastructure is still unclear, according to Reuters, which adds that the country’s economy should recover in the long term although spot shortages of goods will affect short-term performance.

“This is certainly the worst thing that can happen in Japan at the worst time,” economist Nouriel Roubini said in a separate Bloomberg News report. Roubini said Japan will have to institute a massive stimulus program to reconstruct devastated regions, inflating the country’s existing deficit woes; the country is already severely in debt. As the world’s third-largest economy, the financial impact could be far-reaching.

U.S. Trade Gap Widens in January
The United States trade deficit expanded to $46.3 billion in January, a roughly 15 percent increase over the revised $40.3 billion total in December, due in large part to rising energy prices and higher consumer demand for a range of imported goods, according to the U.S. Department of Commerce on Thursday. Exports rose to $167.7 billion in January, while imports climbed to $214.1 billion.

The goods deficit for the month grew to $59.8 billion, a $6.1 billion increase over December, while the services surplus remained relatively unchanged at $13.4 billion. Goods exports increased $4 billion to $120.5 billion, led by industrial supplies and materials as well as automotive vehicles, parts and engines. Goods imports rose by $10.1 billion to $180.3 billion, also due to increases in industrial supplies and automotive vehicles as well as capital goods and consumer goods. Services exports rose to $47.2 billion, while services imports increased to $33.8 billion.

“On one hand, some economists say stronger import growth means Americans are consuming more goods — and that’s good news for the U.S. economy,” CNNMoney.com reports. “But others argue a wider deficit is bad news no matter what the cause, because it points to greater imbalances in the world economy.”

A surge in oil prices helped push imports to rise at the fastest level in 18 months and drove the trade gap to a six-month high in January. This sets a troubling precedent for the rest of the year, as an unusually high imbalance between exports and imports could slow the pace of the economic recovery.

“Many economists expect the deficit to be a drag on U.S. growth in the first quarter and possibly throughout the year,” the Wall Street Journal explains. “Higher imports can reduce overall economic growth by subtracting from demand for domestically produced goods and services.”

Wholesale Inventories Continue to Rise
Inventories at the wholesale level grew 1.1 percent in January to reach $436.9 billion, as distributors rushed to keep pace with sales that rose at the fastest rate in 14 months, according to the U.S. Department of Commerce on Wednesday.

Total inventories of merchant wholesalers were up 11.9 percent over January 2010. Inventories for durable goods grew 1.1 percent from December and 9.4 percent year-over-year, while non-durable goods inventories increased 1.2 percent from December and 15.7 percent year-over-year.

“A slowing pace of inventory accumulation had weighed on U.S. economic growth in the fourth quarter, but a need to restock shelves should now help spur more production,” Reuters reports. “The rise in inventories also offers a signal that businesses expect further sales growth ahead.”

The Commerce Dept. also reports that sales among merchant wholesalers are on a major upswing, rising 3.4 percent to $387 billion in January, the largest gain since November 2009. Sales of durable goods were up 2.3 percent from December, automotive vehicles and parts sales were up 7.8 percent and non-durable goods sales climbed 4.4 percent.

“Wednesday’s report said the amount of wholesale goods on hand relative to sales in January dipped. The inventory-to-sales ratio, which measures how many months it would take for a firm to deplete its current inventory, fell to 1.13 from 1.15 in December,” the Wall Street Journal explains. “The decrease, to the lowest level since April 2010, suggests wholesalers will have to order more goods to met future demand — which is good for factories.”

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