A Strong Dollar May Not Be as Bad as FearedApril 23, 2015
Pundits and journalists keep referencing the supposed negative effects that the recent surge in the dollar may be having on the US real economy and economic growth. The concentration is on the energy sector and the impact on energy-producing firms as well as on the drag associated with the increased costs of US exports to foreign customers. Commentators have focused particularly on the few major US firms reporting earnings that may have been hurt by exchange-rate movements.
However, those firms are not representative of the majority of US companies. Indeed, concerns about the effects of the strong dollar on US companies and the real economy may be overblown, for several important reasons. First, current statistics show that 78 percent of US GDP derives from services, not goods production, so that increases in the value of the dollar are not likely to be all that significant. To be sure, the US does export services, but services exports accounted for only about $709 billion in 2014, or 4 percent of nominal GDP and 30 percent of our exports. We also import services, but they accounted for only $478 billion, or 16 percent of our imports. In the aggregate, movements in the exchange rate affected, on net, about $231 billion more of our services exports than our service imports, that is, less than 2 percent of GDP. Of course, there are distributional effects as far as services are concerned; but in the aggregate, the potential impact of the appreciation of the dollar is quite small.
Second, we all are aware of the benefits that the strengthening of the dollar has had on lowering the cost of imported goods, especially consumer goods and imported petroleum products. In particular, the data suggest that about 98-99 percent of our apparel, including shoes, is imported; so those costs to consumers have declined significantly, as have the costs of about 25 percent of our imported foods—including commodities like coffee, many fruits, and chocolate—that US farmers produce in negligible quantities and hence aren’t protected by import quotas or other subsidies.
Third, what seems to have gotten lost in the debate is the role played by imported goods in improving the competitiveness and profitability of US companies. In 2011, about 62 percent of US goods imports were intermediate goods, commodities and capital goods, which are inputs to production in the US. The reduction in those input costs translates into improved profit margins and indirect reductions in the cost of both goods and services, to the benefit of the real economy—both consumers and businesses alike.
Fourth, while there is much concern about Europe and the status of Greece, which clearly played a role in the US equity market declines on Friday, the trade implications for the US are not at the heart of these concerns. US trade with Europe is relatively small and is dwarfed by our trade, mainly imports, with Canada, Mexico and China. To be sure, the dollar has appreciated significantly against the Canadian dollar and Mexican peso, by some 20 percent over the past year, but only by 2.5 percent against the Chinese Yuan Renminbi. Our trade deficits with these three countries are large, which means the bulk of the effects of US dollar appreciation have been to lower our costs—both final goods and intermediate inputs—significantly.
The bottom line here is that too much is being made of the potential negative implications of the increase in the exchange rate on US exports, and not enough attention has been given to the benefits that have accrued to both consumers and US businesses. A strong dollar is good for the US.
The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.
The preceding is an abridged commentary by Cumberland Advisors and has been reposted with permission. Cumberland Advisors commentaries are available at http://www.cumber.com/commentary_archive.aspx.
Follow Cumberland Advisors on Twitter at @CumberlandADV.