After the Great Recession, American companies went elsewhere in the global economy to help increase sales. At that time, the U.S. dollar was falling in value against other major world currencies, so getting revenue from outside the U.S. made sense.
But things are different now. We have started to hear about first-quarter 2015 corporate earnings and there’s a significant amount of American companies complaining the now strong U.S. dollar is hurting their bottom lines.
3M Company (NYSE/MMM) is one example. With its first-quarter 2015 earnings report, the company’s CEO said, “The stronger U.S. dollar negatively impacted sales and earnings in the first quarter…” Thanks to the rising dollar, 3M said it expects its 2015 sales to decline by six to seven percent. It also reduced its earnings guidance. (Source: 3M Company, “3M Announces First-Quarter Results; Company Posts Sales of $7.6 Billion and Earnings of $1.85 per Share,” April 23, 2015).
3M is just one company. As time passes and the longer the U.S. dollar remains high in value compared to other world currencies, it will not be surprising to see the list of companies negatively impacted by the greenback grow.
The strength of the U.S. dollar can be added to the list of reasons why stock prices have stalled here in 2015. Most economists are expecting the Federal Reserve to raise interest rates in September, and since the Fed has now told us so many times it plans to raise rates, if the Fed doesn’t follow through, it will create a credibility problem for the central bank.
Stronger Greenback to Impact Growth Rate
The misery caused by the rising U.S. dollar doesn’t just end at corporate earnings. A rising currency can have a negative impact on exports, which are an essential part of the gross domestic product (GDP) calculation. Just yesterday, we heard from the U.S. Commerce Department that the economy grew at a 0.2% annual rate in the first quarter of 2015 after advancing 2.2% in the prior three months. As the dollar appreciates compared to other currencies, goods and services to be exported from the U.S. become more expensive abroad.
For example, in 2014, $2.33 trillion worth of goods and services was exported to elsewhere in the global economy from the U.S.—an increase of about 50% from 2009 and the highest amount ever recorded. With the U.S. dollar starting 2015 so strong in value compared to other currencies, it’s almost a certainty the dollar value of exports will decline in 2015. (Source: Federal Reserve Bank of St. Louis, last accessed April 23, 2015.)
Rising U.S. Dollar Dangerous to Economy
If you listen to the mainstream and politicians, they’ll have you believe the strong U.S. dollar is proof our economy is improving and that the U.S. is leading the world “again.” The opposite is true—a strong U.S. dollar is bad for the economy because it negatively impacts our exports and the sales of U.S. multinational companies.
In 2015, key market indices are off to their worst start in years. And, as I have written many times in these pages, I wouldn’t be surprised to see 2015 as a negative year for the stock market.