When the Federal Reserve started raising interest rates the expectation was that the dollar would start rising against other currencies. We also have the tax cuts in the U.S. that are working to drive the dollar higher. I wrote about that in an article back at the end of December. The repatriation of assets has created greater demand for dollars and when demand increases, so does the price.
The dollar didn’t start rising immediately, but it has jumped sharply in the last three and a half weeks. A stronger dollar has a mixed impact on the economy. Theoretically, when the dollar rises our exports to other countries become more expensive. On the other hand the goods we import become cheaper. Unfortunately only one part of this theory is working like it is supposed to so far.
Earlier today the Bureau of Labor and Statistics released the results for April prices. As expected, export prices rose by 0.6% in April. If you take agriculture products out of the equation, export prices were up 0.7%.
The strong dollar is also expected to move import prices down, but that isn’t what happened in April. Overall, import prices rose 0.3% and if you exclude oil, import prices were up 0.2%.
Both import prices and export prices rose in April compared to March. That is the worst possible outcome for a rising dollar. The reason this outcome is so bad is because when export prices increase, US companies that rely heavily on overseas sales will likely see a drop in the demand for their products. If import prices drop, some of the drop in demand for exports can be offset by lower prices in other areas.
Having both export prices and imports rise can be very harmful to the economy. This is only one month’s readings and it isn’t something to worry about just yet. But if this trend continues for two or three months in a row it will become a problem. If exports continue to become more expensive and the demand starts to drop, manufacturers will cut back on production. This will cause the GDP to drop and will also likely cause a drop in employment numbers. Specifically it will cause a drop in the average hours.
If import prices continue to climb along with export prices, we will have inflationary pressures and a slower GDP. This would be a nightmare for the economy—slowing GDP, inflation, lower employment…
Again, this is only one month’s worth of data, but export prices have been rising for almost three years and import prices have been climbing as well, but not as fast. This is something that is worth keeping an eye on for the coming months. If the trend continues, expectations for second quarter GDP will need to be ratcheted down.