IHS Says Economy Can Handle Rough Road

By Dale Buss March 25, 2011

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Despite higher gasoline prices and consumer anxiety over war in the Middle East and disaster in Japan, the U.S. economy should continue in its slow-growth mode for the rest of the year, the chief economist for IHS Global Insight said today in a conference call for clients of the Lexington, Mass.-based economic-research firm.

“The growth in the U.S. over the next few years will be closer to 3 percent a year than the 3.5 percent” for the rest of 2011 that the firm forecasted until recently, said Nariman Behravesh. “But that’s still a pretty decent number. The U.S. economy will be firing on more cylinders in 2011,” Behravesh said, as “the impact from Japan’s disaster and higher oil prices will be limited.”

At the same time, the supply disruptions in Japan’s battered automotive sector have shut down 13 percent of the global auto industry at this moment, accounting already for about 320,000 lost units of production, said Michael Robinet, director of the IHS automotive practice. “In the worst-case scenario,” he said, the world “could lose five million units of production. The worst is yet to come for autos. It has hit Japan, but it will hit outside of Japan over the next three to four weeks.”

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On the Positive Side
Behravesh’s overall optimism is based on a handful of strengthening aspects of the U.S. economy. Consumer spending “is improving quite dramatically,” he said, “and a lot of that has to do with the improving job picture.” IHS forecasts that the U.S. unemployment rate will continue to ease from its 8.9-percent rate in February down to about 8 percent by the end of the year and down to just over 7 percent by the end of 2012.

Behravesh said that net exports also would contribute more to U.S. growth and hoped that the housing market will “stop being a drag by mid-year. Non-residential construction has turned the corner.”

Business optimism, Behravesh said, “is the highest in three years, and cash flow remains very strong.” U.S. companies “have cash and they’ve got the optimism now to spend that cash, especially on equipment, and to some extent in terms of hiring.” He said that “the pace of consumer spending has also accelerated, thanks to a gradual improvement in the employment outlook and diminished worries about a double-dip” recession.

At the Same Time
Yet Behravesh conceded that “higher gasoline prices could put a crimp or a squeeze on household budgets and, therefore, consumer spending. So far we haven’t seen a big issue on that score, but it could develop.” The risk, he said, is that the recent rise in oil prices – to as high as $115 a barrel for Brent crude, in trading today – is likely to be sustained, according to IHS’s own forecasts. A long-term rise of $10 a barrel in oil prices reduces growth that otherwise would occur in the U.S. economy by about 0.2 percent in the first year, then accelerates to a damper of 0.5 percent or more over the next couple of years.

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“So now we’re probably in this kind of situation, where oil prices will be $10 to $15 a barrel higher than we thought a year ago, so we’re looking at shaving growth rates,” Behravesh said. Disruption in supply chains from Japan’s troubles will “not have a major impact on the U.S. economy,” he said, in part because American exports to and imports from Japan are at this point minuscule parts of the U.S. economy.

Woes Concentrate on Autos
Yet, of course, Japanese direct-import exposure is concentrated in auto parts, to the tune of $46 billion a year, and technology products such as semiconductors, which amount to about $12 billion annually, Behravesh said. Auto sales in Japan this year, Robinet forecast, will be down about 9 percent from a year ago.

Global Semiconductor Supply.jpgAn even larger emerging problem for Japanese automakers in Japan, and increasingly for their factories and other automakers they supply abroad, is disruption in the supply of key components and the destruction of capability to manufacture them. Honda, for example, still can’t get to 10 supplier operations within the quarantined zone of potential radiation exposure around the struggling Fukushima Daiichi nuclear-power plant.

“Electronic components such as LCD screens are turning out to be a substantial issue right now,” Robinet said. “Powertrain components including seals... solenoids too. The effect on [Japan’s] silicon capacity has a major effect on the auto industry.” Moreover, there is a limited ability by Japanese automakers and suppliers, and their customers around the world, to “re-source” component manufacture elsewhere.

“You’ve got application and vehicle-specific functions with many of these microprocessors and controllers,” Robinet said. “Gears and solenoids are specific to vehicles and powertrains and are very difficult to redeploy to other sources [of manufacture]. Components can’t be replicated quickly, and processes to build them with the right quality are hard to replicate quickly. This is going to be a substantial brake on global auto production.”

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