Japanese Trade: These are depression-ready numbers

Japanese trade data came out today. The results were stunning. With an almost 16 percent fall in January, Japanese exports have fallen 32 percent in the last three months. This is not an annualized number. Macro data series in industrialized countries (or anywhere else for that matter) simply don’t move like that.

Any optimism I may have had on the global outlook has now fled. Japan exports goods and services primarily to the United States, Europe, and China. Since Japanese exports are foreign imports, this also means that domestic demand in those economies is falling.

The fourth quarter was monumentally bad across the globe. Asia was by far the hardest hit but most economies experienced a decline in GDP and the declines were all bigger (or at least comparable to) their largest declines in the post-war era.

Worse, the deterioration in activity accelerated toward the end of the quarter. The acceleration was most evident in trade and industrial production. Countries as diverse as Brazil, Taiwan, and Germany now have annual falls in IP many times larger than the largest previous downturn on record.

The decline in January Japanese trade means the collapse continued beyond the fourth quarter. That the decline in trade was the biggest monthly fall yet indicates that we have not yet reached terminal velocity. The story is further supported by January capacity utilization for the United States, 68 percent a series low.

To add to this gloom, we have February survey data for the United States and Europe. All of these surveys, after a brief pause in December and January, resumed their downward trajectory. The range of surveys at their record lows

Are we already in a Depression? I said we wouldn’t get close. Then I said, we would probably see one from where we ended up. Now, there is a chance, just a small chance, that we are already there. I don’t know.

Here is why I am worried. There are large portions of output we don’t measure well. And, it seems to me that a lot of the data that has been supporting growth is in these areas. For example, if you look at a close breakout of U.S. trade, goods trade (measured very well) is falling rapidly. Services trade (I don’t even know why we think we can measure this) is holding up very well.

The way forward: Chairman Bernanke testified before Congress this week. Providing the stimulus measures are effective, he expects the economy to turn around in 2009 or at the latest in 2010. You know my views on fiscal stimulus. I believe the policy actions which will be taken across the globe over the next several months are much more likely to push the global economy further into recession than they are to help. (I know I am in the minority.)

There is only one way out of this quagmire and that is forward. It is a painful path: There are no easy answers.

The world’s industrial structure is oriented towards the U.S. (and to a lesser extent the European) consumer. We supported that structure with ever increasing levels of debt. The increase in debt was not supportable. Maybe it would have worked out if productivity growth had stayed in the threes, maybe not.

NorthGG would say we need a large fall in prices to clear these markets. He is right; that would have been an easier path, but it’s not going to happen. Instead, we are going to have to suffer through a long period of adjustment. The adjustment period will last until we have worked off our excesses.

The adjustment won’t be all bad. There will be times when the economy grows well. In the Great Depression 1935 was a pretty good year. In Japan’s lost decade, 1995 and 1996 were pretty good years. I don’t know how long the adjustment will take. Right now I think it is 50/50 between two years and ten. I don’t think there is room for a middle ground.