How Your Small Business Can Take Advantage of the Rising Dollar
The rising dollar, caused in large part by the termination of the Fed’s long-running bond-buying program, has become a key theme among economists, financiers, entrepreneurs and politicians. While the rising dollar is good news for those planning to travel to countries with currencies depreciating against the U.S. dollar and for U.S. workers sending remittances to family abroad, this might not be good news for the U.S. economy – mainly U.S. exporters and multinationals. As major exporters and multinationals suffer, though, small businesses have reason to celebrate.
The Rising Dollar and the U.S. Economy
“A rising dollar is bad for manufacturing. It acts like a tax on all U.S. exports and a subsidy to imports.” – Robert E. Scott, Economic Policy Institute
Over the last five years almost 30 percent of U.S. GDP expansion has been the result of export growth. In 2013 alone U.S. exports totaled almost $2.3 trillion, a 44 percent increase in the dollar value of exports from the most recent low in 2009. In addition, in 2013 11.3 million jobs were supported by the activities and growth generated by overall exports. Working against recent growth, though, today’s stronger dollar will make American-made products more expensive for other countries, thereby slowing down the growth of U.S. exports. Additionally, the appreciated dollar makes imported goods cheaper for Americans, which tends to encourage imports. These effects alone would lead to a negative balance of trade, slowing down GDP growth.
Besides this letup in GDP growth, the rising dollar could seriously hurt many large export oriented American manufacturers that comprise a significant part of the U.S. economy. According to the Bureau of Economic Analysis, the manufacturing sector accounted for 12.5 percent of U.S. GDP in 2013. In its Industry Economic Accounts report, the Bureau also stated that every dollar spent in manufacturing industry added another $1.32 to the economy. This is the largest multiplier effect of any economic sector. As the strengthening dollar increases competition and decreases sales, the country’s many large export-oriented American manufacturers that comprise such a significant part of the U.S. economy will take a big hit.
And that is not all. Besides adversely affecting U.S. exports and large manufacturers, the strong dollar has already hit U.S. multinationals hard. The longer the dollar remains strong, the more it will negatively affect U.S. multinational corporations once they exchange foreign revenue back into U.S. dollars, impeding earnings growth. To put this in perspective, almost 83 percent of the Intel Corporation’s sales have come from overseas, and Qualcomm Inc.’s sales in foreign markets have accounted for 97 percent of its yearly revenue. According to FireApps, the effect of the dollar appreciation looks even more dismal once you compare it with the 1 cent per share currency fluctuation target that multinationals set up for their foreign exchange managers; corporate revenue loss was at least $4 billion in the third quarter of 2014, though actual losses could be much higher as many firms did not disclose full amounts when citing currency impacts.
Good News for Small Business
While a higher dollar poses challenges for U.S. exports, large U.S. manufacturers and multinationals, it can be advantageous for small business manufacturers that rely less on exports for sales. “A small business makes fewer sales overseas than large multinationals, so they aren’t affected as much by the strengthening dollar,” says Phil Orlando, chief equity strategist at Federated Investors. As he and other experts suggest, an appreciating dollar will make imports cheaper, thus cutting expenses for a small business that imports raw or unfinished materials.
Reducing costs of production is vital in today’s global economy, especially for a small business competing in their industry more vigorously than ever before. Competition often requires small businesses to sell their products at reduced prices, which results in lower profit margins. As the dollar gains, importing materials from abroad will greatly reduce production costs, giving small businesses a competitive edge when it comes to pricing. Importing cheaper goods will also give them the chance to considerably raise their profit margins. If they are not already doing so, now is the right time for small businesses to ride the momentum of cheaper imports and seek better deals from overseas suppliers.
Featured image by bark.