US Economy Damaged More Than Thought by Japan Quake

The Japanese earthquake and tsunami in March appears to have damaged the US economy much more than expected and could set back hopes for a robust recovery.

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Toru Yamanaka | AFP | Getty Images

A series of analysts have recently cut their second-quarter gross domestic product projections, based in large part on impact that the Japan disaster is having on the automotive industry.

Factory shutdowns and ensuing problems with getting parts have slowed vehicle production, a move likely to drive up prices, increase unemployment and slow consumer spending, according to recent projections from economists at Goldman Sachs and Deutsche Bank.

Japan is having an impact across a swath of the economy, but is being felt most acutely on vulnerable Detroit automakers, whose business was just beginning to recoverwhen the disaster hit March 11.

"As expected, the hardest-hit sector of the economy appears to be motor vehicle production," Goldman Sachs economist Andrew Tilton wrote in a research note for clients. "Shortages in supply of the key components—notably auto microcontrollers—have led to production shutdowns at US facilities, particularly those owned by Japanese manufacturers."

Consequently, Goldman has cut its second-quarter GDP estimates to 3.0 percent—growth for sure, but below trend and off hopes that the consensus had as the year progressed.

An economic report Wednesday from the US Commerce Department reflected how deep the damage was running.

Orders for durable goods—long-lasting items such as cars and appliances—tumbled 3.6 percent in April, much worse than the 2.2 percent consensus forecast and indicative of how much slowdown effects from Japan are hampering the US recovery.

New orders for transportation equipment plunged 9.5 percent, while shipments for transportation equipment fell 3 percent.

Manufacturing numbers in general have been weak lately, reflected particularly in a series of reports from regional Federal Reserve branches that measure business activity.

Yet Tilton and Deutsche economists Joseph LaVorgna and Carl Riccadonna maintain that the effects from Japan could be short-lived.

Deutsche last week cut its quarterly GDP projections by half a point to 3.2 percent. But the firm focused on a recent report from the Institute for Supply Management projecting continued growth in the second half—albeit at a slower pace.

The Deutsche economists also predicted that first-quarter growth will be revised upward—from 1.8 percent to 2.3 percent—in a report due Thursday.

"While further downward revisions to our Q2 2011 forecast are possible, we are hesitant to make any meaningful changes ahead of what we still believe could be a strong May employment report," they wrote in a note to clients.

The enthusiasm, though, was not universal.

Gluskin Sheff economist and strategist David Rosenberg warned Wednesday of "deepening recession pressure in Japan" that will cause a "spillover on global production schedules" the likes of which was felt in the durable goods report.

The main question seems to be how long the effects from Japan will be felt.

"Both orders and shipments of motor vehicles and parts fell sharply in April, a development that we believe reflects the contagion effects of the loss of key components that are made in Japan but needed for assembling cars in the US," David Resler, chief economist at Nomura Securities in New York, wrote in a note to clients. "This knock-on drag on domestic producers is likely to persist in May and probably June as well."

Goldman's Tilton warned that the smaller supply of autos "will give manufacturers and dealers more purchasing power," driving up inflation fears among consumers already battered by high oil and fuel costs.

He also cautioned that consumer spending would drop by a "fairly small amount" and projected another 70,000 jobless claims filed over the previous four weeks due to slowdowns in vehicle-producing states.

"Higher vehicle inflation and any supply-chain related weakness in vehicle sales should be temporary effects as well, probably fading by late in the year," Tilton said.