Here’s an obvious statement: The U.S. is a consumer-driven economy. Duh, right?
So that’s why we’re scratching our heads over recent mainstream media headlines suggesting a rising dollar is going to handicap U.S. industries. It’s illogical. A strengthening dollar means Americans have more purchasing power (i.e. they can buy more goods).
Here are a few reports we’ve seen recently:
(Note: The U.S. Dollar hit a 14-year high against the euro recently and the U.S. Dollar index is up 7.5% quarter-to-date.)
All of this postulating misses the mark. Think about it. Exports account for just 9% to 10% of U.S. GDP. Sure, a stronger dollar hurts exporters because companies are forced to sell their goods to foreigners whose currencies are relatively weaker against the dollar.
But, conversely, U.S. consumers can buy more goods with their stronger currency. And since consumption makes up roughly 70% of GDP, explains Hedgeye Senior Macro analyst Darius Dale, when the dollar is strengthening American consumers get a boost and so too does the U.S. economy.
There’s more. “If you think about U.S. exports, 50% are capital goods. In other words, we export production,” Dale explains in the video above. Here’s what that means in using a real world example, according to Dale:
“So we send China the stuff they need to make iPhones and they send us back more iPhones that we can buy in the Apple store. Now, if we’re buying more iPhones in the Apple store, well guess what? We’ll probably need to ship more capital goods to China.”
BOTTOM LINE: Strong Dollar = Strong America.