We got an early indication today of how the giant earthquake and tsunami that ravaged northeastern Japan on March 11 damaged the Japanese economy. And it ain’t pretty. The Markit/JMMA purchasing managers’ index (PMI) for March (which you can find here) shows that some serious hurt was put on Japan’s industrial sector. The PMI, an indicator of the health and direction of manufacturing, sank to 46.4, its lowest level in nearly two years. (A measure below 50 tells us that conditions in manufacturing are getting worse.) The drop from 52.9 in February is the largest month-on-month decline in this survey’s history, even surpassing the plunges witnessed after the 9/11 terrorist attacks and the 2008 collapse of Lehman Brothers.
What this suggests is that the damage done by the quake to Japan’s growth could be quite severe. Chris Williamson, chief economist at Markit, wrote that the “decline signals (a) 7% quarterly drop in manufacturing output which is set to push Japan temporarily back into recession.”
The data, though distressing, is far from surprising. The quake destroyed infrastructure, clobbered factories and short-circuited the supply of power, forcing major manufacturers like Toyota and Honda to shut part of all of their production for at least several days. The big question now is: How bad will things get? Williamson admits it is hard to forecast. He notes that the effect on industrial output after both the 1995 earthquake in Kobe, Japan and 9/11 in the U.S. were very temporary. But Williamson adds that the continuing nature of this disaster could also drag out the economic consequences:
It is possible that much of the impact of the earthquake will be reflected in Q2 data, extending a recession to three quarters, but this is difficult to ascertain due to the lack of precedent… There are a number of reasons why production may be affected for longer in Japan than either the experience of Kobe or 9/11 suggest, notably because the disaster affected a wider area and is ongoing, especially in relation to the attempts to manage the situation at the Fukushima nuclear power station and the ongoing impact on people’s lives.
I tend to lean (not surprisingly) on the gloomy side. A big part of the pain inflicted on Japanese manufacturing is being caused by a disruption of the supply chain. With such widespread quake damage, it’s no surprise that the average time it took for suppliers to deliver their goods in Japan suffered the lengthiest increase in March ever recorded in the Markit survey. With the crisis at the Fukushima nuclear plants still burning, and the damage to infrastructure widespread enough to take months if not years to repair, my guess is that factories won’t be running normally in many parts of Japan for weeks, if not months. That means the turmoil in Japan could continue to ripple through global manufacturing networks as well. Then there is this depressing report in The Wall Street Journal showing how hundreds of thousands of Japanese in the area hit by the tsunami and quake have been left either jobless or with no ability to reach their places of employment. Though many economists (including Williamson) believe Japan’s growth will rebound sharply in the second half of 2011, in part due to the reconstruction effort, I can’t see the Japanese economy returning to anything that looks like normalcy for some time. That means an extended period of disruption hitting an economy that was already in poor shape, and perhaps an extended period of slower growth. This first bit of data only gives me more reason to worry about the outlook for Japan’s economy this year. However, this is one time I do hope I’m wrong.