Excluding Special Factors, Industrial Production Is Significantly Weak
The headline industrial production index rose 1.3% in October, after a 3.7% drop in September. The September estimate now shows a larger drop than the original estimate of a 2.8% decline due to revised estimates of the impact of Hurricanes Gustav and Ike on the chemical industry. The Boeing strike also contributed to the weakness in industrial production in September. The positive headline reading reflects a rebound after the end of the strike and a resumption of work at the hurricane-affected industries. According to the Fed, excluding the special factors of hurricanes and strike, industrial production dropped 2/3 percent in both September and October.
The 0.6% increase in manufacturing output in October following a 3.7% drop in September is, as noted earlier, the result of a rebound after the impact of hurricanes and a strike brought down production. Excluding these factors, factory production is estimated to have declined about 1% in September and October. These significantly weak data are consistent with readings seen during recessions. Autos were assembled at annual rate of 8.09 million in October, the lowest since December 1990. Production in the high-tech sector has dropped for three consecutive months, with the 0.9% decline in October as the largest of these three monthly declines.
The operating rate of the factory sector averaged 73.65% in the September-October months, which is nearly six percentage points below the 1972-2007 average. The operating rate averaged 76.8% in the July-August period, which puts the September-October average 3-points below this mark. We have to go back to the 1981-82 recession to see similar sharp declines in the operating rate.
Japan: Official Recession Poised To Get Worse
Today’s indicators out of Japan confirmed what we had expected – that Japan is in recession, though the consensus believed there were enough one-offs to growth to keep the headline figure on the positive side of zero. Real GDP contracted by 0.1% from the previous quarter after a sharper fall of 0.9% in Q2 (originally -0.7%), with Q3 consumption rising by 0.3% after a fall of 0.6%. True, there were factors that perked up private consumption, but they were not enough to overcome a weak net exports figure that will only get worse in the coming quarters.
Japan’s top two export markets – the US and China – account for over one-third of total overseas sales, and both are experiencing sharp slowdowns in growth. The US is all but officially in recession, and China’s growth, while substantially higher, is also decelerating by a similar number of percentage points (about four by year-end). Regionally, the major trade hubs are in the same situation, with Hong Kong and Singapore already experiencing negative growth and several emerging markets slowing export consumption rapidly. It does not look like anyone outside of Japan will be able to bail it out of this recession.
As far as the domestic economy is concerned, the political debate continues about a fiscal stimulus package with some direct impact features – checks sent to taxpayers and such – to keep private consumption from dipping into the red. The ruling LDP is reluctant to run up a public debt stock that has only recently leveled off, but the opposition, which maintains a majority in the upper house, has promised to make life very difficult for the government if it does not present a sizeable fiscal stimulus program soon. The two sides will be discussing a possible compromise over the next few weeks, but the opposition has been pressing for snap elections that the LDP would surely lose, so these negotiations are likely to be a drawn out process. Political bickering could hold up any form of stimulus until 2009, perhaps even until the new fiscal year begins on April 1.
Last week we had penciled in a Q4 GDP figure of -1.0% on a quarter-on-quarter basis that assumed no more fiscal stimulus this year. Unfortunately, we are feeling more and more secure that negative growth will continue well into 2009, at least through Q2 – a five-quarter recession – and perhaps beyond if Tokyo policymakers do not address a problem that is only getting worse.
