The strong U.S. dollar signals economic growth, but it is also hurting American businesses overseas, especially manufacturers, who face falling sales, squeezed profits and prospects of major job cuts.
Caterpillar Inc., for example, the world’s largest construction and mining equipment maker, faced stiff competition due to the strong U.S. dollar and the plummeting oil prices that led to a tough energy equipment market since last year.
“Sales and revenues in Asia-Pacific were down 13 percent, with the most significant decline in Construction (equipment) Industries at 21 percent,” said Mike DeWalt, Caterpillar’s vice president for finance services. “Construction Industries were down substantially in China and lower in Japan as a result of the stronger dollar versus the yen. Our sales in Japan, which are in yen, essentially translated into fewer dollars.”
Caterpillar Inc., announced last month, it would lay off 150 full-time production workers at its plant in Decatur, Ill. The indefinite layoff beginning this month resulted from weak demand for mining equipment.
For U.S. Steel, the strong dollar has reduced profits from its sales in Europe, and competition from South Korean steel has put pressure on the company to lay off 2800 U.S. employees in 2015.
Other corporate giants like Coca-Cola, Pepsi Co., Colgate-Palmolive, Johnson & Johnson and Mattel have indicated the strong dollar is playing a major part in their earnings last quarter.
Some smaller domestic companies Midstate Berkshire, manufacturer of aerospace, defense, power generation and oil and gas industry products, said in a press release that the company would lay off almost a third of its 250 workers to stay in the competitive market.
Exports comprise about one-eighth of U.S. economic output and were instrumental in the recovery from the 2008 recession. Though other sectors are improving, the trade deficit is at a six-and-half-year high, according to a recent report released by the U.S. Census Bureau and the U.S. Bureau of Economic Analysis through the Department of Commerce. Manufacturers projected that exports for the first quarter of this year were down from last year.
The top exporting industry groups created only 300 jobs in April compared to 11,000 in January. The primary metals producers, including steel makers lost 1800 jobs in the first few months of this year. In April, machinery producers cut 5,200 jobs.
Even if companies increased sales overseas, the revenues are smaller when converted to the stronger dollar. This can lead to mismatch between costs and revenues, and the export-oriented companies find it difficult to compete.
Admittedly, the West Coast port strike also weakened exports in the last few months. Though that strike has been settled, its effects continue to challenge the exporters.
“I have met with manufactures in the last couple of weeks who continue to complain about that there are still items they haven’t received or items they haven’t been able to ship out,” said Chad Moutray, chief economist for the National Association of Manufacturers. “I think the backlog of the port issue will take a while for it to make its way to the system.”
But the fundamental factors hurting exports continue even after the strike is over.
The dollar has appreciated around 19 percent since June last year because the U.S. economy is doing better than the rest of the world’s, despite a weaker-than-expected first quarter. At a time when other central banks are cutting rates, the Federal Reserve is expected to raise interest rates this year, further strengthening the dollar.
The dollar is going to stay strong all of this year and move into 2016 with a strong value.
Since the strong dollar makes exports expensive abroad, larger companies can manage their profits with the currency swings. But smaller companies cannot afford to do so, said Bruce Phipps, founder and owner of MPI Incorporated, maker of wax-room equipment. Though his company hasn’t yet seen a big difference in sales, he predicts the strong dollar will impact his business.
“I think it will absolutely hurt long-term, especially in some of the Asian countries we sell to,” he said.
Weak exports are only a small part of the bigger story. The strong dollar’s impact is also felt in the durable goods orders. Boeing, an American multinational corporation, is competing against Airbus, a France-based aircraft manufacturer, in price, and the strong dollar certainly gives Airbus an advantage over the other. Airbus has beaten Boeing to win a big order from Delta Airlines of 50 jets worth approximately $6 billion at market price. The decisive factor of the deal was that Airbus agreed to deliver the order earlier than Boeing, which has unfilled orders for 850 Dreamliners.
Among the few winners is Nerak Systems, which designs, manufactures, installs and maintains vertical conveying equipment for powder and bulk materials and unit loads or packaged items. Simone Wakefield, executive vice president, who imports raw materials from Europe for domestic businesses, said the strong dollar and the weaker Euro make it easier to earn more for her money.
While the dollar is gaining strength, the euro is weakening because of Europe’s dwindling economy.
“Right now the world economy is a bit precarious, and we will probably see fewer exports,” said Bill Watkins, executive director, Center for Economic Research and Forecasting at Cal Lutheran University. “But that’s not all because of the dollar, but also because our customers are suffering through.”
Some economists say the manufacturing sector will continue to weaken as the strong dollar weighs down on exports.
“I think overall growth should pick up in the second quarter,” said David H. Sloan, senior economist for 4Cast Inc. “But manufacturing should be fairly subdued and flat.”
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