By Hunter Bosson '18
After seven years of recession and stagnation, the United States is finally seeing the friendlier side of the business cycle. The U.S. economy added 295,000 jobs in February, bringing total unemployment down to pre-recession levels of 5.5%. However, as the American economy is finally rediscovering its wings, it must confront its old nemesis: a strong dollar.
With foreign economies facing stagnation, the relative strength of the American dollar has naturally increased. The Euro is valued at $1.05, the highest exchange rate the dollar has seen in twelve years. Other currencies have depreciated as well; everywhere from Russia to China to Japan,economic slowdowns (or Russia’s case, implosions) have caused downward pressure on currencies. Meanwhile, as the Fed entertains raising interest rates, dollar-denominated assets, and consequently dollars, are becoming much more attractive.
Now is a bad time for a strong currency. Although the American economy is significantly less vulnerable than in 2008, unfavorable exchange rates are hitting corporate profitability hard. A stronger currency makes foreign goods cheaper and exports more expensive, forcing domestic firms to
lower their prices or lose market share. The strengthened dollar, along with lower oil prices, has lowered forecasts for 2015 profit growth to 1.7% as companies that sell abroad (particularly energy firms) lose competitiveness. The stock market is particularly vulnerable; almost half of S&P 500 company sales came from overseas. Already American firms’ shares have taken a beating from investors concerned with their leverage towards overseas markets. Meanwhile, consumers have fared better; travel costs for American tourists have declined as much as 20% in some countries. But the end result is that with American firms forced to export less abroad and American consumers drawn towards cheaper foreign goods and services, the U.S. trade deficit (over $500 mil in 2014) is set to increase.
Of course, as is the case with international trade, all is not lost. The vast majority of S&P 500 company profit drops will be in the energy sector, which is unsurprising so long as crude oil is going for less than $50 per barrel. In fact, without the energy sector, S&P 500 company profits look to increase by 8.4%, even with the stronger dollar. Hidden in the fury of doomsday predictions that always accompany a strengthening currency is the central question: why? Is the dollar strengthening because the American economy is strong or because its competitors are weak? A thriving economy can weather unfavorable exchange rates, and may even benefit from lower import costs, but stagnant trading partners will drag everyone down with them. Both cases appear to be happening now, suggesting the trend has a neutral impact on the U.S. economy.
We all knew that the dollar’s depreciation would be short-lived, and now it is time for the first great test of the post-recession economy. Historically, the U.S. economy has grown well with a strong dollar, albeit typically with stronger trading partners. Should foreign stagnation turn to global recession, a strong dollar will not be the United States’ primary concern.
Sources:http://www.washingtonpost.com/business/economy/dollars-surge-against-euro-comes-with-pluses-and-minuses-alike/2015/03/11/6861fcfa-c817-11e4-a199-6cb5e63819d2_story.htmlhttp://www.npr.org/2015/03/12/392589994/analysts-mixed-on-whether-strong-u-s-dollar-is-positive-or-negativehttp://www.reuters.com/article/2015/03/13/us-usa-results-companies-idUSKBN0M915R20150313http://www.washingtonpost.com/blogs/wonkblog/wp/2015/03/06/u-s-economy-added-295000-jobs-in-february/