Area Economy

Stronger dollar means less foreign demand for Michigan goods

July 19, 2013
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Following the great recession, foreign demand for made-in-USA goods contributed a lot to Michigan's economic development by cushioning anemic domestic demand and unusually high unemployment rates.

The drivers of foreign demand were robust growth in the emerging economies of Asia and Latin America, as well as a weak dollar.

With a low value of the dollar, goods made in Michigan's factories cost less to foreigners and thus become more affordable and more attractive overseas. As a result, foreign demand for American goods increases, which leads to higher company sales, more profits and additional local jobs tied to exports.

This time around, however, a rising dollar has begun to generate adverse effects upon the foreign demand for goods made in Michigan. In the last 24 months, the value of the dollar has increased 14 percent against a basket of currencies of major trading countries.

Since August 2011, the euro has lost 11 percent of its value against the dollar, implying that businesses and consumers from the Euro Area — like from Germany, France, Italy, Spain, the Netherlands, Austria and Belgium — now have to pay 11 percent more than two years ago to buy American goods.

Similarly, the Canadian dollar and British pound lost 7 percent and 9 percent of their value, respectively, against the dollar in the last two years. Hence, buyers from these two important foreign markets for Michigan’s exporting companies now find prices of American goods to have substantially increased.

Very surprisingly, since August 2011 the Japanese yen has lost nearly one-third of its value against the dollar. That makes American goods 31 percent more expensive for Japanese buyers; conversely, Japanese products — like cars — are now 31 percent cheaper for American buyers.

Looking at the latest state snapshot of international trade numbers, foreign sales of goods made in Michigan rose in May by 5.2 percent after an increase of 11.8 percent in April. Michigan's exporting companies sold $5.13 billion in goods overseas in May, adjusted for seasonal variation.

Compared with a year ago, Michigan’s exporting companies this May surpassed their export performance in May 2012 by $312.4 million, or 6.5 percent.

Michigan’s foreign sales in May reflected the mix of trends in foreigners’ demand for goods made by different industries. Overseas shipments from Michigan's manufacturers — which accounted for 87 percent of all exports — increased to $4.46 billion, seasonally adjusted, which was 8.6 percent more than April’s level of factory shipments.

Exports of non-manufactured goods went down 13.1 percent in May to $665 million, adjusted for seasonal variation. This group of foreign sales consists of agricultural goods, mining products and re-exports, which are foreign goods that entered the state as imports and are exported in substantially the same condition as when imported.

Exports of goods for the country as whole fell by 0.7 percent in May to $130.3 billion, adjusted for seasonal variation. So far this year, national exports of goods edged up slightly by an annual rate of 0.7 percent from the same period a year ago.

How does Michigan match up to other states in export growth in 2013? In the first five months of the year, foreign sales from Michigan’s companies increased by an annual rate of 4.3 percent compared with the first five months in 2012. As a result, Michigan ranked eighth among states in export growth so far this year.

What are the prospects for growth in the world economy, which would drive demand for goods made in Michigan during the rest of this year and in 2014? In its July update of the world economic outlook, the International Monetary Fund cut its global growth outlook for this year and next. According to the report: “Global growth is projected to remain subdued, (driven by) slower growth in several key emerging market economies, as well as a more protracted recession in the Euro Area.”

IMF’s latest outlook predicts economic growth in the industrial countries to register 1.2 percent in 2013, which is weaker than its April 2013 projection of 1.3 percent. In 2014, growth in industrial countries is expected to slightly accelerate at an annual rate of 2.1 percent.

The Washington, D.C., based international organization forecasts economic growth for emerging and developing countries — the group that includes China, India and Brazil — to hit 5 percent in 2013 and 5.4 percent in 2014.

Important for Michigan’s exporting companies, the IMF forecasts the volume of global trade to grow just 3.1 percent in 2013 and then to accelerate to 5.4 percent in 2014, compared with an increase of 2.5 percent in 2012 and 6 percent in 2011.

IMF’s outlook predicts worldwide imports of the industrial countries to edge up only by 1.4 percent in 2013. However, worldwide imports of emerging and developing countries are forecast to increase by 6 percent in 2013.

Consequently, emerging and developing countries will be driving foreign demand for Michigan’s exporters, contributing to local production and jobs substantially more than the high income industrial countries.

Evangelos Simos is chief economic adviser of the consulting and research firm e-forecasting.com. He may be reached at eosimos@e-forecasting.com.

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