Japanese Rebuilding Efforts Could Lift U.S. Economy

The epic earthquake causing chaos in Japan may signify another global concern for U.S. investors, but subsequent rebuilding efforts there may give the American economy a nudge by increasing demand for basic materials like steel and heavy machinery like tractors.

With the dust still settling and the aftershocks still being experienced from Friday’s massive 8.9 magnitude earthquake, it may be too early to predict precisely how the disaster will impact the global economy.

Yet preliminary reports indicate the U.S. recovery will remain intact, and may even benefit a bit from efforts in Japan to rebuild roads, buildings, transportation hubs and energy facilities.

“It’s not going to be a negative impact on the U.S.,” said Lakshman Achuthan, managing director at the Economic Cycle Research Institute. “It may actually be a positive.”

In an effort to rebuild their infrastructure, policymakers in Japan may loosen the purse strings and unveil new measures to increase government spending despite the country’s heavy debt load.

“It’s almost a QE3 globally when you have a disaster of this magnitude because it opens the door to make it acceptable to inject capital,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald, alluding to the Federal Reserve’s $600 billion bond-buying program that has been dubbed QE2.

At the same time, the quake and subsequent tsunami may help ease upward pressure on crude oil, which backed away from recent highs and briefly fell below $100 a barrel on Friday. While much of those declines were chalked up to an absence of major protests in Saudi Arabia, lower energy prices would likely help boost U.S. consumer demand.

Construction and engineering plays such as heavy machinery makers, miners, lumber distributors, steel makers and concrete companies may all benefit from the rebuilding efforts.

“Now they have to rebuild highways, transportation systems and buildings. There are a myriad of industries that will feed into that,” said Gus Faucher, director of macroeconomics at Moody’s Analytics.

The knee-jerk reaction on Wall Street led to rising stock prices for those sectors.

Fluor (NYSE:FLR), the No. 1 public U.S. engineering company, saw its stock increase 2%, while engineering and construction firm KBR (NYSE:KBR) jumped 4%. Blue-chip tractor maker Caterpillar (NYSE:CAT) received a 1% bump.

Shares of U.S. Steel (NYSE:X) and AK Steel (NYSE:AKS) climbed nearly 4% and 5.5% respectively.  Likewise, miners Newmont Mining (NYSE:NEM) and Freeport McMoRan (NYSE:FCX) gained more than 2% each.

Manufacturers, which have been leading the U.S. recovery, may also benefit if they are called on to make up for supply disruptions in Japan.

Meanwhile, crude oil prices, which have surged in recent weeks to two-and-a-half-year highs amid the violence in the Middle East, headed south on Friday.

It’s not clear how much of that retreat is due to the Japanese disaster, but the earthquake could cause lower energy demand in Asia, easing gasoline prices on cash-strapped American consumers.

Overall, forecasters didn’t appear worried the situation in Japan would derail the U.S. recovery, which has gained some steam in recent quarters. New economic data released Friday showed retail sales jumped 1% in February, building on January's 0.3% rise.

“The business cycle drivers are all reinforcing themselves to the upside here,” said Achuthan “When people go to the stores, that just moves up production and hiring and income and then people buy more. That process is a positive feedback loop.”

The Dow Jones Industrial Average gained just modestly Friday afternoon, underscoring the thinking that any positive effect on the U.S. economy will be limited.

On the other hand, insurers with exposure to Japan may come under pressure as they are forced to issue heavy payouts to cover mounting damage. Aflac (NYSE:AFL), the No. 1 insurance company in Japan in terms of individual policies in force, eased almost 1%. Other multinational insurers like Traveler’s (NYSE:TRV) and Allstate (NYSE:ALL) also retreated.

The disaster is also sure to have an impact on trade between the U.S. and Japan, which are major trading partners. The U.S. imported $9.97 billion of goods from Japan in January, while exporting $4.99 billion of goods.

Pado predicted a “short-term disruption and then a long-term [increase in] demand through rebuilding.”

Despite the fact that all eyes on Friday were on Japan, the political unrest paralyzing parts of the Middle East and North Africa is still seen as having a bigger impact on the U.S. economy because of one crucial factor: crude oil.

Ultimately, supply disruptions at pivotal oil producers, namely Saudi Arabia and Iran, appear to be the bigger risks to domestic growth.