US growth: First casualty of a strong dollar

Highway signs near Clarksdale, Mississippi, US Image copyright Getty Images

The latest GDP figures for the US shows the economy has virtually ground to a halt as first quarter growth was just 0.2%.

That's 0.2% growth, on an annualised basis, so that means that there was negligible growth in the first three months of the year relative to the previous quarter.

The biggest drag on that growth was exports. Exports fell by 7.2% with a drop of more than 13% in terms of selling goods overseas. And that's the impact of a strong US dollar as well as disruptions at America's biggest ports.

The dollar has risen on the back of expected rate rises by the Fed, and has hit the highest level in more than 10 years against its trading partners.

That has hit the ability of US exporters to sell their wares overseas. Tellingly, services exports continued to grow by 7.3% since selling services isn't very dependent on the price but rather rely on the quality of what's proffered. It's also not dependent on ports.

Consumption

A strong dollar, though, helps consumption and imports, which registered positive growth of 1.8%.

In other words, a strong dollar makes imports cheaper and keeps down price rises. Those imports feed into consumption, which expanded by 1.9%.

That's not the strongest growth rate, since there are also reports that cold weather made consumers reluctant to venture out and spend.

But it's a positive growth driver alongside investment, which also expanded by 2%. The final component of GDP, government spending, contracted by 0.8% due to continued cutbacks by state and local governments.

So, what growth the US economy eked out was due to private consumption and investment.

Impact

And that's been the traditional driver of the US economy - consumers. And, economists are already predicting that American consumers have completed their deleveraging process, so the engine of growth may well return later this year.

And thus the prediction that the Federal Reserve will begin to normalise, ie, raise interest rates, later in the year.

For now, the impact of anticipating rate rises has strengthened the US dollar since markets anticipate and "price in" what's expected to happen.

And that has dented growth now.

Blip

For the Fed, which concludes its two day policy meeting today, any signal that these figures are causing a re-think of when rates may rise will surely be closely watched.

And, markets are likely to again price in what that means.

In any case, the US strong dollar policy which has favoured consumption over exports is likely to remain unchanged. After all, the United States is largely driven by consumption and a strong currency makes buying imports affordable.

Besides, its services exports again are unlikely to depend on the value of the dollar so that surplus is intact even in today's release.

For those reliant on the US coming back as an engine of growth, the hope will be that this quarter is indeed just a blip due to the currency.

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