Manufacturing and the strong US dollar
INSIGHT ARTICLE |
It is ironic that the continuing recovery of the U.S. economy—normally an encouraging development—could pose a threat to some U.S. manufacturers. A stronger dollar is a sign of optimism and carries with it increased purchasing power. Yet, as we have noted before, declining import prices are attracting more foreign competition to the U.S. market, and U.S. companies that rely on overseas markets are beginning to realize that their sales in foreign markets may be declining in the coming months.
As we’ve seen in The Wall Street Journal and elsewhere, many large U.S. manufacturers are already adjusting their strategic plans in response to the opportunities presented by a strong U.S. dollar1:
- Investing in foreign markets becomes more attractive. In the face of foreign competition, some U.S. manufacturers are investing in overseas facilities or acquiring overseas operations.
- Prices for materials or products from overseas suppliers are lower. Purchasing power for manufacturers is strengthened.
- U.S. consumers will have more money to spend as import prices decrease. This could boost retail sales, demand for certain manufactured products and confidence in the economy overall.
But there are challenges as well:
- Many manufacturers, especially those with international risks, are cutting back on sales forecasts. Some are anticipating being undercut on pricing as foreign economies weaken.
- The rising cost of exports is making it more expensive for manufacturers to reach overseas markets.
- In anticipation of declining sales, workforce reductions are being made. According to ADP, manufacturing employment was down 48,000 for the year at the end of 20162.
- Rising U.S. interest rates will create higher borrowing costs for U.S. manufacturers.
- A stronger dollar will limit interest in domestic expansion or investments.
As Joe Brusuelas, chief economist at RSM US LLP, notes, the effects of a strengthening U.S. dollar may not be felt by middle market manufacturers until the spring or even later in the year. Some manufacturers are hoping that the anticipated tax and regulatory policies of the new administration—yet to be hammered out, let alone enacted—will help offset lower expectations that result from a strong U.S. dollar.
So what’s a middle market manufacturer to do in the meantime? We suggest that forward-looking firms should start now to develop a risk assessment process:
- Evaluate the potential impact of international competitors on their revenue streams.
- Analyze the supply chain to take advantage of the increased purchasing power.
- Consider if a currency or commodity hedging strategy for revenues and purchases denominated in U.S. dollars is appropriate.
- Manage inventory levels closely in case revenues are affected in the future.
- Manage investments in U.S. manufacturing carefully until a clearer picture emerges of U.S. economic and investment policies as defined by the new administration in Washington, DC.
- Consider foreign investments or acquisitions that align with the overall corporate strategy.
- Develop enhanced sales strategies for the U.S. market.
While it’s not certain what the ultimate impact of the rising value of the U.S. dollar will be on individual U.S. manufacturers, sitting on the sidelines waiting to see what happens will likely create challenges for your company. Start working now on some of the above ideas now as you implement your 2017 strategic plan.
1. Tangel, A., Zumbrun, J. “Dollar’s Rise Threatens Manufacturing Recovery” (Dec. 26, 2016) The Wall Street Journal
2. ADP National Employment Report (Dec. 2016)
For companies in a cycle of diminishing revenues—and for those with ambitious growth goals—a number of trends are worth watching.
RSM US Chief Economist Joseph Brusuelas says a stronger U.S. dollar will weigh on manufacturing in the second half of the year.