US industries losing battle against their own currency - WSJ
The WSJ report concludes that while an increasing value of dollar against foreign currencies means stronger purchasing power for US importers however this is exerting pressure on American manufacturers competing with cheaper products in foreign markets.
This has resulted in foreign producers exporting to the US to gain an advantage against the local manufacturing industry, which is being challenged in foreign markets as its goods become more expensive, as per a report published by WSJ.
The increase in dollar value can be traced back to the nationwide shutdowns during the pandemic, as well as the stimulus checks that have been issued by the US government, and most recently the sharp rate hikes introduced by the Fed as the US economy battles four-decades-high inflation, which in turn resulted in international investors purchasing US dollars in order to buy Treasure Bonds.
In a simpler explanation, parity between the dollar and the Euro will be focused on: If US kinder eggs are being sold to Europe for 1$, then the purchasing party in the EU would have to pay (theoretically) 1 euro. However, if the euro becomes weaker than the dollar, on the presumption that 0.5$ equals 1 euro, then European consumers would have to pay 2 euros for the same product. On the other hand, if we stick to the same hypothetical value, and Kinder eggs are to be sold to the US market, then 1$ has the power to purchase 2 Kinder eggs from the EU, becoming a challenging competition for products produced locally.
The WSJ report adds, citing industry analysts, that the impact of a stronger dollar will likely result in a decline in revenues for manufacturers that will be revealed in their third quarterly reports later this month.
Drew Greenblatt, president of Marlin Steel Wire Products LLC, a manufacturer of wire baskets for medical and industrial use, told the WSJ that during Covid, the sales volume of the company increased as US hospitals, that previously purchased their equipment from China, started buying their needs from Marlin Steel Wire Products.
Unpredictable Supply chains and the sharp increase in shipping costs that impacted the globe since Covid have led to many American companies replacing their overseas suppliers with local producers. On the set of the increasing domestic demand, more production lines and new manufacturing plants have been established in the US, which in its turn resulted in reintroducing massive job counts that have been previously lost in favor of markets with cheaper labor.
Greenblatt added that he bought another production facility from Indiana last year in order to increase production, and has also started producing lately mesh products for semiconductor US plants while introducing robotic welders and increasing 50% space at his main plant located in Baltimore. Greenblatt described the current disadvantage against European producers, as "like they’re having a 10% or 20% sale," citing that it is due to their current pricing power that is overcoming their soaring energy costs and recession.
According to the report, Europe's dwindling economies have impacted sales of US companies in EU markets. Whirlpool Corporation sales fell by 19% in Q2 year on year in Europe, Africa, and the Middle East, while 9% was a result of currency-exchange values.
On the other hand, Agco Corporation, an American company specializing in making and selling farm equipment, witnessed a currency-related 8.5% drop in sales revenue in the EU and ME regions, which accounts for more than 50% of the company's export markets, in the first half of 2022.
However, according to the WSJ report, there are US companies that were at an advantage when it came to currency fluctuation. Local American plants that rely on components imported from foreign countries with weaker currencies to manufacture their final products have benefited from a strong dollar, which means strong purchasing power abroad.
CEO of Generac Holdings Inc., Aaron Jagdfeld, told the WSJ, " We view the strengthening dollar as helpful to offset higher logistics costs we’re paying,” as the company produces electricity generators using components from Japan, EU, and other countries. The CEO however stated that, due to tariffs imposed on Chinese products by the Trump administration and as shipping costs remain high, the full advantage of a high-value US dollar was not realized.
US manufacturing advocates voiced their concern that a strong dollar will decrease the profits of local manufacturers while foreign producers will have the advantage to penetrate the US markets. Harry Moser, president of the Reshoring Initiative, expressed to the WSJ that a strong US currency "has a debilitating effect on US companies." Reshoring Initiative is a consulting group that aims to help US companies manufacturing abroad return to the US.
According to economists, however, the disparity between the USD and other foreign currencies is expected to decrease as it is expected that the Central Banks of other countries will follow suit on raising rates, which in turn will lead to a lowered interest in the dollar by foreign investors who expect this to take place by the first half of 2023.
In addition to foreign central banks increasing rates, another factor that will pressure the USD to decrease in value is the US trade deficit growth during Covid. Joel Prakken, co-head of US economics for S&P Global Market Intelligence stated to the WSJ, "The post-Covid recovery in the US was very aggressive and it sucked in a lot of imports," adding that trade deficit, which was $1.1 trillion in first 6 months of 2022 compared to $790 billion during the same period in 2021, can't go on as dollar demand by foreign investors decreases. Prakken also stated that he expects that higher interest rates accompanied by a possible recession will result in lower local demand which in turn will lead to a reduction in the US trade deficit thus a lower dollar value.
Almost $10 trillion in losses for US economy, GDP declining rapidly
Citing Federal Reserve data, CNBC reported on Wednesday that the steady decline in the New York Stock Exchange (NYSE) that commenced at the beginning of this year annihilated over $9 trillion in investors’ wealth, and is expected to continue - already possibly reaching the mark of $10 trillion.
Americans’ holdings of corporate equities and mutual fund shares, as demonstrated in the data report, plunged from a high of $42 trillion in January down to about $33 trillion as of June 30 but as these statistics are three months outdated, financial experts foresee losses amounting to a total between $9.5 trillion and $10 trillion, pushed by the gradual decline of stock values since July.
Earlier this month, the stock market witnessed its worst day in over two years after inflation data crushed investors' expectations that moderating price pressures would compel the Federal Reserve to scale down its interest-rate hike campaign. Everything from stocks and bonds to oil and gold was sold by investors. The Dow Jones Industrial Average's 30 equities all fell, as did the S&P 500's 11 sectors. Only five of the broad benchmark's stocks closed the session with an increase. Meta Platforms sank by 9.4%, BlackRock fell by 7.5%, and Boeing plummeted by 7.2%.
Despite the financial and market crises provoked by the Covid-19 pandemic, and per an Oxfam report, a whopping 573 new billionaires emerged on the market just in the span of two years - sending 160 million people into extreme poverty. According to the most recent Economic Confidence Index score by Gallup, August ratings represented the public's most pessimistic view of the economy since the Great Recession ended in early 2009, with 47% expressing pessimism with 16% describing it in good condition.
The United States' GDP declined in the first two quarters of 2022, which is often seen as an indication of a recession.
Fed officials have stated repeatedly that they will continue to raise interest rates in order to chill the economy, even if monthly data show some signs of improvement.