Is the Slow Economic Data Due to Japan or Something Deeper?

by Bespoke Investment Group

Over the last several weeks, we have been discussing the slowdown in economic data on both an absolute basis and relative to expectations. Within the investment community there is a debate over whether the slowdown is a temporary side-effect from the massive earthquake in Japan back in March, or part of a broader global economic slowdown. Ultimately only time will settle this debate, but a look at two widely watched economic indicators and how they reacted following the January 1995 Kobe earthquake shows that the recent slowdown is more likely a result of the earthquake in Japan, and therefore temporary in nature.

In the charts below we show the four-week average of US initial jobless claims and the ISM Manufacturing report going back to 1994. In each chart, the red line represents the six months following the 1995 earthquake and the months following the March 2011 earthquake. 

Before the Kobe earthquake in January 1995, the four-week average of initial jobless claims was steadily declining, and then immediately reversed higher when the earthquake struck. It then steadily rose for the next six months and did not peak until more than a year after the earthquake. The current pattern of jobless claims shows a similar one to 1995. As shown in the chart, the four-week average of jobless claims actually hit a post-recession low on 3/11, which was the day of this year's quake, and has now risen in eight of the ten weeks since then.

The ISM Manufacturing Index has also shown some similarities between now and 1995. In 1995, the ISM index declined for five consecutive months following the Kobe earthquake. In the current period, the ISM Manufacturing Index actually peaked in March and has declined in each of the two months since then.

While the two indicators highlighted below do not ultimately prove what has caused the recent economic weakness, they do show some strong similarities to the period following the 1995 Kobe earthquake. Furthermore, the fact that both indicators were hitting their best levels in several years leading up to the earthquake implies that the earthquake is making its presence felt in the data.

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