WASHINGTON, May 18 (Reuters) - Declining motor vehicle production as assembly plants grapple with a shortage of parts due to Japan's earthquake may hurt U.S. second-quarter growth, but much of the pain could be blunted by booming exports.
Supply chain disruptions caused by the March earthquake sent motor vehicle output tumbling 8.9 percent in April, Federal Reserve data showed on Tuesday. That resulted in a contraction in manufacturing for the first time in 10 months.
There are fears auto production, which added 1.4 percentage points to growth in U.S. gross domestic product in the first three months of the year, may now be a drag. Some financial institutions, including Deutsche Bank, are already trimming their second quarter GDP estimates.
'This is slowing industrial production and is going to subtract anywhere from half-a-percentage point to three-quarters-of-a percentage from the current quarter estimate,' said Carl Riccadonna, a senior U.S. economist at Deutsche Bank in New York.
Before Tuesday's industrial production data, Deutsche Bank had been expecting economic growth to accelerate to a 3.7 percent annual pace during this quarter after a sluggish 1.8 percent rate in the January-March period.
'We lowered it by half-a-percentage point to 3.2 percent. We are going for a more conservative narrowing because other manufacturing activity is still expanding despite the supply disruptions in the auto sector,' said Riccadonna.
The drop in auto production was the most tangible piece of evidence so far to suggest the impact of the devastating Japanese earthquake on the U.S. economy could be a bit larger than initially thought.
Federal Reserve Chairman Ben Bernanke last month saw a 'moderate and temporary' effect on the economy. Economists believe the supply chain disruptions will continue through June, with the situation starting to ease at least by August.
Figures were not readily available on the volume and size of Japanese-made parts used at U.S. assembly plants. Parts from Japan range from transmissions and navigation systems to items as small as windows.
According to Howard Simons, a research strategist at Bianco Research in Chicago, Japanese-made parts account for almost a third of components used in the production of motor vehicles globally.
'So much of the U.S. automobile production chain is integrated with the Japanese supply chain. So, it's going to be something similar to the global scale,' said Simons.
EXPORTS TO SOFTEN PAIN
The fallout from the supply chain disruptions will likely be mitigated by firming export growth. Some of the surge in exports is expected to be fueled by Japan's reconstruction.
U.S. exports jumped to a record $172.7 billion in March.
'Manufacturing excluding autos continues to advance due to strong export demand, robust business equipment spending, and low inventories in the American supply chain,' said Chris Christopher, a senior principal economist at IHS Global Insight in Lexington, Massachusetts.
Christopher noted that a weak dollar and strong economic growth in emerging markets was supporting U.S. exports.
Ironically, the shortage of vehicle parts could also slow imports into the United States and narrow the trade deficit.
'Although auto production has fallen, the drop in imports of those parts will have some offsetting impact as far as GDP goes,' said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.
The magnitude of the drop in vehicle production last month caught many by surprise, given the Institute for Supply Management's manufacturing survey for April had shown little evidence of supply chain disruptions.
In addition, the government's employment report showed motor vehicle and parts payrolls increased 2,900 in April.
Auto plant shutdowns as companies scale back production to deal with the shortage of parts has been blamed for some of the recent spike in new claims for unemployment benefits.
There is a risk that economists may be underestimating the impact of the Japanese earthquake on the economy.
'It's hard to get a firm read of what is happening here. The problem is we don't have a lot of similar periods to compare to, so have to go back to the Kobe earthquake in the mid-90s,' said Deutsche Bank's Riccadonna.
'Exports to Japan accelerated after that episode and there was not a material negative impact on the U.S. economy. Trying to draw those parallels to the Kobe earthquake may be giving us a little bit of a misread on the data.'
(Reporting by Lucia Mutikani; Editing by Andrew Hay) Keywords: USA ECONOMY/AUTOS (lucia.mutikani@thomsonreuters.com; +1-202-898-8315; Reuters Messaging: lucia.mutikani.thomsonreuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2011. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
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