So much for the Japanese renaissance which somehow is supposed to lead to a surge in Q3 US GDP growth. Following yesterday's surprisingly strong factory production growth rate of +5.7% (the second highest in history), every economist (and Joe LaVorgna), was already shifting their strawman from declining energy costs (which are now back to early June levels courtesy of the IEA idiocy), to Japan as the last bastion of growth. Alas, the just released Tankan quarterly index of large manufacturer confidence has confirmed that the rumors of Japan's economic reincarnation have been greatly exaggerated after it dropped by the most since the Lehman collapse, plunging from +6 in March to -9, well below the economist (and Joe LaVorgna) consensus of -7. From Bloomberg: "Forecasts by Panasonic Corp. (6752) and Hitachi Ltd. for weaker earnings have added to signs of depressed demand. Monetary tightening by Asian economies grappling with inflation means that Japanese companies also can’t count on customers within the region for boosting sales. “The global economy is starting to slow, heightening uncertainties about its future direction,” Ryutaro Kono, chief economist at BNP Paribas in Tokyo, said before the report. “The downside risks to China and other emerging economies seem to be on the rise." In other words, the global economic growth is impacting Japan, and it is not the Japanese slowdown that is impairing some mythical global growth story. Of course, by the time the economist (and Joe LaVorgna) pool figures this out, QE 3 will be well on its way.
Household demand has also been weak, with consumer outlays sliding 1.9 percent in May, a report today showed, a larger drop that predicted by analysts. The unemployment rate unexpectedly fell to 4.5 percent as more people gave up on looking for work and disaster areas were excluded from the survey. Consumer prices excluding fresh food increased 0.6 percent in May, the government said.
Panasonic last week forecast full-year profit will tumble 59 percent in the fiscal year started April after the earthquake disrupted factories and suppliers. Sales of car-related components and mobile phones will probably drop because of supply-chain bottlenecks, Panasonic’s Chief Financial Officer Makoto Uenoyama said.
Hitachi Ltd. last month forecast net income will drop 16 percent this fiscal year after the temblor crippled its factories.
Recent data indicates that the recovery in the corporate sector may be stalled. Machinery orders, an indicator of future capital spending, dropped for the first time in four months in April. Exports fell more than economists projected in May from a year earlier. On a seasonally adjusted basis the shipments increased 2.5 percent in May from April.
On the other hand, when you don't get what you want, you can always hope. Just ask the American population circa November 2008:
There are also signs that Japan is recovering from the temblor. Industrial output rising at the fastest pace in more than 50 years in May as carmakers such as Toyota Motor Corp. and Honda Motor Co. restore their plant operations ahead of schedule.
Today’s report showed manufacturers see the sentiment index improving to 2 in September and large companies said they plan to boost capital spending 4.2 percent this year, exceeding economists’ predictions of a 2.4 percent increase.
As for the previously noted surge in production, well, that has now plateaued as well:
Production is expected to rise 5.3% m/m in June -- revised down from the 7.7% rise previously estimated -- and will increase further by 0.5% in July (first estimate), according to the government's latest survey of firms' forecasts.
[H]eightened concern over the outlook for business conditions on the back of the ongoing nuclear crisis and concern over a electricity supply shortage this summer are causing firms to put some capital investments on hold.
And to end things on a humorous note, heeeeeere's Joey:
Commentary for Friday: The Chicago purchasing managers’ index (PMI) was much better than expected, rising to 61.1 in June from 56.6 previously. Given its geographical proximity to the motor vehicle industry and its later monthly release date relative to the earlier month PMI releases—in particular the NY (-7.8) and Philadelphia (-7.7) Fed surveys, which were both sharply negative in June—the recovery in the Chicago PMI strongly suggests that manufacturing activity got a noticeable boost from improving auto sector conditions in the back half of the month. We expect this improvement to continue through the second half of the year, consistent with what are noticeable gains in motor vehicle production schedules. This should add at least one full percentage point to real GDP growth if not more in both Q3 and Q4 2011. In light of the Chicago news, we are raising our ISM forecast significantly from where we were previously. As we wrote in the US Daily Economic Notes earlier this week, the Chicago PMI has nearly twice the weight in a regression-based estimate of the ISM relative to the combined weight of the NY and Philadelphia Fed surveys. Our new ISM forecast is 53.0 versus a pre-Chicago forecast of 49.5. Remember that based on what we had seen in the NY and Philadelphia Fed surveys, we had assumed Chicago would come in at 53.0. More importantly, regardless of this morning’s ISM results, recent economic data from Japan point to a sharp increase in the ISM next month.
As shown in the chart below, a weighted average of the Japanese manufacturing and services PMIs has been a good leading indicator of the ISM. When the Japanese PMIs rolled over in March (-15.0 points) and softened further in April (- 1.0), this foreshadowed a sharp decline in the May ISM (-6.9), and what we think will be a slight drop in June. Since then, the Japanese PMI data have recovered strongly in May (+11.2 points) which hints at a sharp bounce in the July ISM, given the formers’ two-month lead.
We are confident the markets will ignore today’s construction data but it is important for estimates of Q2 real GDP since construction was down so much in Q1 (-8.5%). Through April, we have seen modest gains in residential and commercial construction (+3.0% and +9.3% respectively). We are optimistic this recovery will continue. —JL
Well of course you are. Although we sure would love to see a matrix somewhere that indicates what your bonus will be based on (i) the (in)accuracy of your predictions, which so far are among the worst on Wall Street, and (ii) based on what the actual final "growth" of the economy is at the end of the year.
Update: as we type this, the Chinese manufacturing PMI has just come out at 50.9, down from 52.0 and below expectations of 51.5.