Binary shifts in the global markets may determine the outcome for U.S. growth in 2015. The drastic fall of oil prices in 2014 led to cheaper gasoline, positive news for consumers and heavy users of fuel such as airlines. Meanwhile, the U.S. dollar has climbed steadily higher, putting pressure on U.S. exporters who face higher costs compared to global competitors. So which force will ultimately pull the economy in its direction? While the finish line is not yet in sight, the momentum appears to be on the dollar’s side. Several exporters have stated that dollar-related struggles hurt their profitability in the first quarter, and according to FactSet, earnings of publically traded companies in the first three months of 2015 are on track to decline 3.3% year over year, the first annual drop since 2012. Additionally, consumers remain sitting on the sidelines, opting to augment their rainy day funds instead of injecting cash into the economy. The savings rate jumped to 5.7% in January and February from 4.7% in the second half of 2014. U.S. exporters have several levers they can use to try to get ahead of a strong dollar, such as raising prices, reducing capital expenditures or moving production overseas to protect their earnings. Unfortunately, these maneuvers would negatively impact domestic growth, and tactics such as increasing prices are difficult to execute without hurting sales. For example, Consumer-goods giant Proctor and Gamble Co., who raised prices to offset currency issues in developing countries, said last week that their decision to do so contributed to a 2% drop in sales volume in the first quarter of 2015. As we move through the second quarter, economic data points should paint the picture of whether or not the dollar’s Q1 win will be here to stay.
Source: FactSet, New York Times, Wall Street Journal