The bullish US dollar sentiment is becoming a problem for the fragile economy as the demand for American made goods slipped in June. The U.S Trade gap widened significantly in June growing over 7% to US$43.8 billion in a move that may have some strong implications for the economic recovery.
As the U.S dollar has continued to strengthen imports have exponentially increased, as foreign manufacturers reap the benefits of the wind fall. At the same time, U.S. exports are down over 3% which is significant as the sector was a key contributor in the countries recent economic recovery. Subsequently, American economic growth could be relatively subdued in the coming months if the trend continues.
Global demand has cooled since the start of the year and a muted slowdown in China, and the current turbulence in the EU member states, threatens to continue the trend. A continuation of the slowdown is likely and could place the U.S. Fed’s 2.3% annualised GDP forecast in peril. It may also leave the data driven central bank questioning whether a rate rise is subsequently warranted.
It would appear that the U.S economy is out of step with global growth, especially considering most western nations are looking at ways to stimulate export growth through currency depreciations. Interest rate cuts, large scale bond buying, and macro-prudential policy changes seem to be the flavour of the month and so it is not unexpected that U.S exports would suffer. However, the scale of the increasing trade gap is surprising and could very well imperil further economic gains in 2015.
The trade gap is likely to act as an anchor to U.S growth in the next two quarters as exports become severely disadvantaged due to the rampant Dollar. In fact, many small American manufacturers are already reporting a noticeable downturn in sales. It should also be noted that the trade gap with Mexico and Europe are actually at their highest relative levels since records have been kept.
The reality is that if the U.S Fed does indeed go ahead and raise rates, it will widen the trade gap further and lead to additional stand downs in American manufacturing. In a sector of the economy already beset with jobs departing offshore, it would be unsurprising to see further layoffs and structural unemployment.
The harsh reality of the global nature of trade means that manufacturing typically goes to the most efficient operators and unfortunately the relatively high wage and operating cost structure in the U.S makes it difficult to compete in some sectors. So whilst NAFTA may have initially opened the door to jobs and manufacturing industries disappearing offshore it will eventually be the U.S Dollar’s strength that finishes them off.
Ultimately, in the increasingly global macro-economy, it is innovation, efficiency, and CAPEX that drive competitiveness because without those components it simply becomes a race to the bottom on prices or indeed currency valuations.