“Ben White” - Japan crisis takes toll on U.S. economic recoveryv
March 17, 2011 Ben White
3/16/11
http://www.politico.com/news/stories/0311/51451.html
NEW YORK—The unfolding crisis in Japan has begun to have an impact on the fragile recovery of the U.S. economy despite assurances by Obama administration officials and many analysts that it does not pose a significant threat to economic growth here or across the globe.
Stocks plunged again on Wednesday, whipsawed by rampant fear that the one of Japan’s nuclear plants damaged by last week’s massive earthquake was spiraling into an uncontrollable meltdown. Despite a modest late day recovery, Wall Street’s three major indices have been falling for nearly a week, wiping out most of their gains for the year after rising sharply on hopes for a robust U.S. economic rebound..
The Dow Jones Industrial Average fell by as much as 300 points before rallying somewhat late in the day to close down 242, or about 2 percent at 11,613. The S&P 500, which offers a broader view of U.S. corporations, also sank dramatically before paring losses and is now down for the year.
The Nasdaq, home to many technology companies that could be hit by an interruption in the delivery of Japanese-made parts, was also off sharply on Wednesday and is now down for the year after a week of significant losses.
“Most of the analysis done to date has been based on the assumption that the nuclear problem was abating,” said Mark Zandi, chief economist at Moody’s Analytics.”Now that’s been called into question. That’s why the market is so nervous.”
Several analysts said the enormous amount of uncertainty surrounding events at the Fukushima Daiichi nuclear plant in northeastern Japan, especially news that a second reactor had ruptured, sent skittish investors racing to lock in any gains they have made this year.
“If Japan gets the situation under control the market should recover pretty quickly,” Zandi said. “I still do not think that there will be significant global implications. Japan will certainly feel it but it won’t have much impact beyond that.”
However, Zandi and others analysts conceded that while the fundamentals suggest only a modest 2 percent decrease in Japanese GDP in the short term and perhaps a gain in the longer term given massive government reconstruction spending the events following the earthquake and tsunami tap into persistent anxiety that uncontrollable “black swan”events could derail a global recovery that remains fragile at best.
“This just ratchets up all the existing uncertainty in a huge way,” said David Kotok, chief investment officer at money management firm Cumberland Advisors. “And I think there are big implications for the U.S. economy. Ten percent of Japanese electrical power generation in permanently gone and now they will have to deal with a possibly catastrophic radiation and health issue.”
Kotok added that any big slowdown in Japan, which produces 40 percent of the world’s electronic components, would dent supply chains for many global companies, from airplane manufacturers to stereo equipment makers.
“This is the world’s third largest economy we are talking about. It has to have an impact. And they are only third now because China just passed them.”
Wednesday’s troubling news from Japan came amid grim reminders of other huge clouds over the U.S. economy. Housing starts had their biggest monthly drop in nearly 27 years as building permits dropped to a record low, according to the Commerce Department. Those figures underscore how vulnerable the U.S. remains to any outside shocks.
So far, the Obama administration has played down any economic threat from Japan, focusing solely on the humanitarian crisis.
In appearance before the Senate Banking Committee on Tuesday, Treasury Secretary Timothy Geithner dismissed any concern that Japan might start selling off its vast holding of U.S. Treasury bonds in order to raise cash to spend on reconstruction.
Japan currently holds about $886 billion in U.S. Treasuries, second only to China’s $1.2 trillion and nearly four times as much as the United Kingdom, the third biggest holder.
Asked if he feared such an outcome, which could drive up U.S. borrowing costs, Geithner calmly said, “I do not.” He added, “Japan is a very rich country, very high savings rate. And it has the capacity to help deal with not only the humanitarian challenge but the reconstruction challenge they face ahead.”
President Barack Obama has also declined to get deeply involved in the crisis in any public way, sticking to a new White House strategy of avoiding crisis mode based on any day’s headlines, no matter how alarming they may be.
On Friday, he leaves for a five day trip to Latin America where he will focus on trade and security issues. “We are leaving on schedule on Friday,” press secretary Jay Carney said Wednesday. “It bears repeating that this is a crisis — there is no question about it. And it is a crisis in Japan. It is not a crisis in the United States.”
That strategy may offer long-term political dividends but in the case of the market reaction to Japan, analysts say it risks creating the impression that Obama is ignoring the one issue critical to his reelection: the health of the U.S. economy.
Kotok of Cumberland Advisors said this could play into the broader perception of a lack of leadership from the White House on reducing the budget deficit and expanding domestic energy production to blunt spikes in oil prices. This is a significant issue in the Japan disaster given its likely impact on nuclear power as a clean energy source.
“I think you can wrap the White House in with the leadership of both parties on Capitol Hill with failing to offer any leadership on these enormous issues at a time of great economic duress in the United States,” Kotok said.