By Jason Lange
WASHINGTON (Reuters) – The sharp rise in the U.S. dollar’s value is hitting American exporters and forcing layoffs at makers of everything from steel to machinery, taking the shine off stronger job creation across the broader economy.
Exports make up about an eighth of America’s economic output and helped power the initial economic recovery from the 2007-09 recession.
But exporters’ job losses do raise some concerns about economic growth as the Federal Reserve moves closer to its first interest rate rise since 2006.
The nation’s top 10 exporting industry groups outside of agriculture shed 1,700 jobs in the three months through April even as employers in the rest of the economy added staff, according to a Reuters analysis of government data released on Friday.
The U.S. dollar is up about 20 percent against major currencies since June last year, making goods and services sold abroad more expensive for foreign customers.
The appreciation in the currency weighed on first quarter profits across corporate America, including at soft drink giant PepsiCo Inc <PEP.N> and toothpaste producer Colgate-Palmolive <CL.N>.
For steelmaker U.S. Steel, the rise in the value of the dollar reduced profits from its sales to Europe, while also making steel from South Korea more competitive abroad, helping to force layoffs of 2,800 U.S. employees so far this year.
“It’s starting to wind down here,” said David Clark, the president of the local chapter of the United Steelworker Union in Fairfield, Alabama, where U.S. Steel is idling plants that supply the auto, appliance and oil industries.
Clark is one of about 9,000 U.S. steel employees who have received notices they could be laid off.
The top exporting industry groups had been creating about 11,000 new jobs a month over the last year but added just 300 in April. The job losses since January were the first for a three-month period since the summer of 2013.
Among the top exporters, primary metals producers, which include steel making, have shed 1,800 jobs this year, U.S. Labor Department data showed.
Payrolls at machinery producers, another top exporting industry, have cut 10,900 jobs, including 5,200 in April alone.
The dollar’s gain has been powered by Fed guidance that it could soon raise interest rates to keep inflation in check.
“It is part and parcel of the tightening,” said Phil Lachowycz, an economist at Fathom Consulting who is advising investors to buy shares of companies that serve the U.S. market.
With interest rate rises in Europe and Japan looking much more distant than in the U.S., investors are crowding into U.S. securities to take advantage of higher yields, given a likely Fed interest rate rise this year.
One risk for the U.S. economy is that the dollar might be dragging on growth more strongly than policymakers anticipate. Economic growth stalled in the first quarter partly because of plunging exports and surging imports.
An analysis by Jesse Edgerton, a former Fed economist now at JPMorgan, found the currency’s appreciation appeared to be stunting exports more than in the past. “We’re not sure why,” he said, adding that recent West Coast port strike disruptions and slowdown in the oil industry, as crude oil prices tumbled, also weighed on exports.
Several of America’s export-heavy sectors with job losses are the same ones Edgerton found suffered sharp hits to their orders. About 40 percent of primary metals get shipped abroad, when including the goods made with them, and new orders of primary metals have tanked by 9.0 percent since June. Machinery output is similarly being hit by sagging orders.
Despite the bad export sector news, rising consumer spending and falling unemployment could still indicate the economy’s underlying health is improving.
The shift from exports to domestic-led demand is a regular feature of U.S. business cycles. Corporate profits from foreign markets surge when the Fed cuts interest rates to fight recessions, only to fall back as U.S. consumers recover and rates rise.
Domestic industry accounted for 83 percent of corporate profits in the fourth quarter, up from 66 percent during the depths of the recession, according to government data.
Some of the dollar’s surge has unwound in recent weeks on signs Europe’s economy was finding stronger footing.
But many companies, including small ones, are still feeling the pinch.
Seattle-based Synesso, a maker of high-end espresso machines, expects sales to fall up to 12 percent this year in part because the dollar’s strength gives Italian competitors an edge.
“If somebody is on the fence between our equipment or a piece of Italian equipment, they buy the Italian,” said company owner and designer Mark Barnett. “They use the dollar to sort that out.”
(Additional reporting by Howard Schneider; Editing by David Chance)