Natural and Man Made

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September 9, 2011

In every economic expansion there comes a point of inflection when growth accelerates because businesses are no longer able increase output with their existing staff. When that point is reached, employment growth accelerates.

In the current recovery which is now more than 2 years old, that inflection point was reached in the February to April 2011 period. Employment growth accelerated as businesses became more worried about losing sales than holding down costs and consumer spending was picking up speed. Then, a series of disasters hit. There were natural disasters and man-made disasters and together they brought the economy to a screeching halt.

Natural Disasters. The most important of these was the earthquake and subsequent tsunami in Japan. This event and the crisis at the nuclear power plant that followed it was a tragedy for Japan. It also created stress throughout the global manufacturing economy as many parts for goods produced throughout the world come from Japan. Supply chain disruption was especially evident in the motor vehicle industry. In the US motor vehicle sales plunged 11% from April to May as supplies were constrained.

There were additional natural disasters including tornadoes in the Southeast, flooding in the Midwest and most recently hurricanes in the Southeast and Northeast. When events like this occur, the immediate economic impact is a pause as households and businesses assess the impact. These natural disasters all played a part in causing the economy to weaken in the second quarter and employment growth to slow.

Man Made Disasters, The natural disasters of the spring and summer were exacerbated by ones that were man-made: the European debt crisis and the US budget deficit and debt ceiling debate. These political debates and negotiations caused businesses and consumers to become more cautious because it was unclear how the issues would be resolved and how the resolution would impact them.  Would taxes increase? Would spending be cut? Would the political leadership be able to come together and resolve the issues?

Unfortunately, for the most part these questions have not been resolved either in the US or Europe.

In an environment of uncertainty businesses and consumers have taken a wait and see approach. Not knowing what they face, they are holding back on all but essential spending. The result is the economic slowdown we are now experiencing. Demand from consumers and businesses is rising, but only slowly.

With the impact of the natural disasters, particularly Japan now fading, it is the man-made disasters that are having the greatest impact on the economy. They have reduced confidence and put a damper on the recovery just as it was taking off.

 

Ken McCarthy
Senior Economist, Senior Managing Director, Research
Cushman & Wakefield

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