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Goldman Quantifies Adverse Impact From Japanese Earthquake: Up To 1% Of Q2 GDP, Higher Inflation
And once again Goldman takes the lead (well technically the far more credible Stone McCarthy was first) in being the first bulge sellside economic team to acknowledge that following a very weak economic performance in Q1, with consensus GDP now just barely above 1.5%, Q2 GDP will have to contend with a Japanese supply shock, which contrary to expectations will actually subtract from the current quarter's GDP. How much? As much as 1% according to Goldman's Andrew Tilton. To wit: "Reasonable parameters suggest a potential impact on Q2 annualized
real GDP growth from one-quarter point to as much as a full point.
Although there could be some additional impact in other sectors of the
economy, this seems likely to be quite small." And when all is said and done we expect this number to double. Recall that none of this factors for what appears to be an oil price fixed well north of $110 (and $120 for everyone not in the US). Remove another 1% from Q2 consensus GDP for that, and what do you get? 1% at best... if very lucky. And some more bad news for US automakers (that's right Government Motors, we are looking at you and you "no impact from Japan" BS): "We think a reasonable “optimistic” scenario is only a 5% cut in US
vehicle production, whereas a reasonable worst-case scenario would be
something like a 20% cut in Q2." Time to retain GETCO for another "no sub $30 print in GM" assignment. Oh yes, and for those looking for deflation under rock and tree, more bad news: "As a hypothetical example of how this would affect consumer prices, a
3% increase in new vehicle prices that carried through to the used car
market as well would be worth 19 basis points on the headline Consumer
Price Index (where vehicles have a weight of slightly over 6%) and 25
basis points on the core."
Goldman's note summary:
- The severe earthquake and tsunami that struck Japan in mid-March, and the subsequent damage to nuclear power generation and concerns about radiation, have disrupted production activities in northern Japan. Although some plants are already back to full speed and others are expected to be soon, more lengthy shutdowns at a few critical links in the global supply chain—particularly in the vehicle manufacturing sector—are likely to have some impact on US production in coming months.
- The impact on GDP depends primarily on (1) the size of the impact on vehicle production, and (2) the extent to which this spreads across the entire supply chain or mainly affects assembly operations. Reasonable parameters suggest a potential impact on Q2 annualized real GDP growth from one-quarter point to as much as a full point. Although there could be some additional impact in other sectors of the economy, this seems likely to be quite small.
- Data on vehicle production and industrial activity in coming weeks will provide more clarity as to the extent of the effect. Our base-case scenario of a 1/3-1/2 percentage point impact to annualized GDP growth in Q2 assumes that vehicle production will fall approximately 10% on a quarter-over-quarter basis.
Full note:
The human and economic cost of the severe earthquake and resulting tsunami that struck Japan in mid-March is enormous and not yet fully known. Our sympathies are with those affected by this catastrophe. Beyond the initial impact, the prolonged damage to power generation and concerns about radiation in the vicinity of damaged nuclear facilities have heightened the impact on the economy—particularly to production activities in northern Japan.
A number of world-leading firms in the semiconductor and vehicle manufacturing sectors operate in northern Japan, and in some cases produce a significant fraction of world supply for key components. Although some of these plants are already back to full speed and others are expected to be soon, more lengthy shutdowns at a few critical facilities—particularly in the vehicle manufacturing sector—are likely to have some impact on US production in coming months.
A particular area of concern is auto microcontrollers. A microcontroller (MCU) is essentially a tiny computer compressed onto a single chip, and is used in a variety of automotive applications, including engine controls, safety electronics, and climate control. A mid-sized car can have more than fifty MCUs, some of which can be highly customized. Because MCUs are small, relatively high-value components, they are typically air-freighted and vehicle manufacturers operate with low inventories on hand. Vehicle manufacturers sometimes rely exclusively on a single supplier for particular MCUs, and it is difficult for those suppliers to shift production to a new location, and qualifying a new supplier can easily take 6-12 months. One firm with roughly a 40% share of the global market for these products has several key facilities in the affected area, one of which is expected to be offline for several months. In short, MCUs have all the characteristics of a key supply chain bottleneck.
Our auto analysts expect roughly a 10% decline in North American vehicle production in Q2, overwhelmingly due to a shortage of MCU supply. (To put this in perspective with the financial crisis, US vehicle unit production fell at slightly faster rates in the third and fourth quarter of 2008, and three times as rapidly in the first quarter of 2009.) However, there is considerable uncertainty about this estimate, for several reasons. First, the extent of the production disruption in MCUs is not known precisely; power outages could slow production at multiple facilities, and the speed at which the inactive plant can be brought back online is uncertain. Second, the exact amount of inventory in the supply chain is not known precisely, although it appears likely to satisfy most demand into early May. Third, the dependence of US-based manufacturing facilities on the specific brand and types of MCUs produced in northern Japan is not entirely clear; in theory, the peak effect could be anywhere from zero (if no US facilities rely on the particular processors that are disrupted) to 100% (if every US-produced vehicle uses at least one MCU from a plant that is shut down). We think a reasonable “optimistic” scenario is only a 5% cut in US vehicle production, whereas a reasonable worst-case scenario would be something like a 20% cut in Q2.
Beyond the impact on vehicle production, there is uncertainty about how much of the supply chain would be affected. Will parts and component makers, including suppliers of items like auto glass, continue to produce at normal rates and build inventory, or will they too reduce production? To the extent they follow suit, the near-term impact on domestic production (GDP) will be magnified. The share of auto assembly in GDP is about 0.4%; adding vehicle parts raises this share to 0.8%, and adding the full supply chain (i.e. including items such as auto glass or steel; we estimate this by subtracting vehicle and parts imports from total US gross output of vehicles) would raise that share to 1.3%. We expect a majority of the supply chain to be affected, though producers of certain components with very tight inventories (possible examples include tires, bearings, and some fuel efficiency components) may choose to continue producing normally for some time to build inventories to more normal levels.
The tables below provide estimates of the impact of GDP (left grid) and industrial production (right grid) with various assumptions as to the impact on production and the supply chain. The shaded area represents our best guess at the likely impact: a 10% cut in Q2 vehicle production that affects most or all of the supply chain.
Our base-case scenario suggests downside risk of 1/3 to 1/2 point on second-quarter annualized real GDP growth. (This estimate is reasonably consistent with one in the Bank of Canada’s latest Monetary Policy Report, which estimated a 1/2 point impact on Canadian growth in Q2; the share of vehicle production in Canadian GDP is nearly twice that in the United States.) It also implies a 2-3 point reduction in the annualized growth rate of industrial production over the quarter. We’ll be able to get a better sense for how the vehicle sector is tracking from indicators of weekly vehicle production as well as the Federal Reserve’s report on April industrial production (due out in mid-May).
Note that in addition to the impact on US production, output from manufacturers in other parts of the world—particularly Japan—will be affected. This is likely to reduce US imports of vehicles meaningfully. The United States is a net importer of vehicles and parts to the tune of roughly $10bn per month; imports run at roughly $20bn per month, of which about $4bn is from Japan. We expect a drop of at least $2bn/month in net vehicle imports (i.e. an improvement in the trade balance), potentially more, over the course of Q2. However, most if not all of the reduction in imports should be offset by a reduction in vehicle inventories. US GDP would not be affected unless domestic production somehow fell further as a result; if anything, it could get a boost if some US facilities were able to increase production and take market share from imports. However, because of reasonable inventory levels at the moment, and because the supply chain issues will constrain domestic producers’ ability to ramp up, we simply assume that any decline in imports will be fully offset by a decline in inventory accumulation. Thus, we expect the GDP impact to be well summarized by the tables above.
We do not expect a major impact on other US industries from the earthquake-induced supply chain disruptions. This certainly remains a risk—for example, production of some wafers used in semiconductor manufacturing has been interrupted—but our analysts in the technology sector believe that production disruptions here are likely to be shorter-lived and covered by available inventory.
Assuming there is no lasting impact on US demand, any loss to GDP in Q2 is likely to be made up in subsequent quarters. Our working assumption is that we will make up about half of the impact in Q4 and the remainder in 2012—in other words, that a return towards normal production levels boosts GDP growth slightly in late 2011 and early 2012—although the risk here is probably that this normalization drags out over a slightly longer period. (Our auto analysts assume all the normalization comes in 2012.)
A final potential impact of the earthquake “supply shock” is on pricing. Manufacturers’ pricing power has already improved considerably since the dark days of the financial crisis, with capacity utilization in the sector rising from about 35% at the trough in early 2009 to 67.3% in March, and days’ inventory falling from over 100 in early 2009 to 53 in March. In the near term, supply chain difficulties should further boost net prices. In fact, in recent days Ford, GM, and Toyota have raised prices from 0.4% to 1.7% on some 2011 models. Higher commodity prices may be part of the explanation, but the expectation of tighter inventories may have contributed to the decision as well. A back-of-the envelope comparison of pricing incentives to inventory levels suggests that if inventories fall from the March level of 53 days to somewhere around 30 days by the late summer—as our analysts expect—net vehicle prices could rise several percentage points via a combination of higher list prices and lower incentives. As a hypothetical example of how this would affect consumer prices, a 3% increase in new vehicle prices that carried through to the used car market as well would be worth 19 basis points on the headline Consumer Price Index (where vehicles have a weight of slightly over 6%) and 25 basis points on the core. This would likely be a temporary effect that would fade as inventories returned to normal levels in 2012.
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"potential impact on Q2 annualized real GDP growth from one-quarter point to as much as a full point....there could be some additional impact in other sectors of the economy...."
Yes. The impact on the total economy will be, but there might be more elsewhere.
(soft gurgling sounds accompanying subdural hematoma)
Oh, and does this mean that their newly minted recommendation about shorting treasuries is to be amended and redacted now that the great economic paralysis is to be recognized officially, or is this just the happy to see me boner for QE666?
The Squid knows no Bounds, wonder if they will continue to keep their Tokyo office workers there when the first radiation cancer patients start rolling in
1% sounds ridiculously low. This is a major trading partner, hello. More like 5%, just a hunch.
He he he.
I dont think deflationistas will have to look under every rock and tree much longer.
Offensively Omnicient. GS not that good. This earthquake is profoundly impactful and not a !% GDP impact. Crazy lying people that try to quantify at this point.
STORM THE FUKUSHIMA NUCLEAR CONTROL ROOM WITH 15,000 SOULS AND SHUT ER' DOWN
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resume export production
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get ann coultier on tv 'that bitch is a genious'
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ZERO percent bottleneck thats right... hell if they can just pass some nucular Jtarp soil bailout... i just may be able to sleep 8hrs
Denial and docility about the unfolding and far from finished crises (economic, nuclear, earthquake/tsunami, debt) have kept the lid on the building pressure cooker in Japan. But when it blows, look out.
Whodathunk:
General Motors Co. says its vehicle production “has been impacted by the events in Japan.” The announcement is among the first indications that breaks in the global auto-industry supply chain resulting from last month’s earthquake and tsunami in Japan will eventually affect U.S.-based car makers in the same way it has hurt Japanese manufacturers.
http://blogs.wsj.com/drivers-seat/2011/04/20/general-motors-may-cut-production-due-to-parts-shortages/?mod=google_news_blog
A mere flesh wound.
quantifukation
that is really an amazing rant about the vehicles and the computer chips and the points. what i get is goldman saying there is some insanity about the japanese auto industry, perhaps... winnie the freaking pooh wouldn't try to translate this... goldman GDP: quantifukation under anaesthesia...
Ordered a 2012 Mustang GT last week, told I won't get it for at least 4 months (normal is 8 wks) as a hold is on due to lack of parts form Japan. So yeah US producers are being affected, big surprise. Other surprise is that the 6 speed trans is made in China.
Does anyone else remember when talking heads were claiming this earthquake 'could be good for Japan's GDP' a few weeks ago?
Someone should get sued for misleading the public.