Does a weaker dollar pump up profits for U.S. corporations? After all, a frailer greenback produces a double boost for overseas sales. Not only are U.S. goods cheaper abroad, but revenues are also enhanced when sales in stronger currencies are translated back into dollars. So the benefit to U.S. exports--and corporate earnings--could be a bright spot amid the otherwise dismal fallout of higher inflation and interest rates connected with a sliding currency.
To be sure, the foreign factor is having a big impact on earnings--but it isn't the weaker dollar that's giving export operations their healthy glow. Instead, stronger economic growth is fueling demand for U.S. products. That's especially evident in Southeast Asia and Latin America, which together buy 25% of all U.S. exports. As a result, BUSINESS WEEK economists believe U.S. companies' earnings from overseas operations for this year should increase by about 10%, to $71 billion (chart). That's better than the 7.7% advance of 1993. And it's the biggest increase since the 14% gain in 1990, which was also aided by stronger economic growth abroad.
Not that the weak dollar won't have an impact. But it may be limited. True, the dollar has dropped about 10% against the Japanese yen and German mark. Both Japan and Germany, however, have been in severe recessions, so demand in those countries for U.S. goods has been extremely weak. And keep in mind that the dollar's slide since January has not been widespread. In fact, the dollar's value has hardly changed when measured against a total of most of the world's currencies.
BLAZING SALES. In countries where the economies are expanding, though, sales of U.S. goods and services--from shampoo to insurance--are booming. In South Korea and Singapore, where economic growth may average 8% this year, U.S. exports are already up 14%, to $12 billion, for the first five months of 1994. Likewise, exports to China, where the economy could grow 10%, are running 14% ahead of last year's $3.2 billion.
Some companies have already booked some of the benefits in their second-quarter results. At Colgate-Palmolive Co., for instance, unit sales worldwide rose 9% in the second quarter. But volume in the Asia-Africa division was up a blazing 24%. Sales in Malaysia, Hong Kong, and China were exceptionally strong.
Overseas operations are likely to carry even more weight in the second half, as Europe rebounds. After a two-year slump, Germany will grow at an annual rate of 3% in the third and fourth quarters, say economists at Deutsche Bank. And with the Continent's biggest economy recovering, Europe should expand just under 3%. And here's where the weaker dollar will help. "A currency advantage at the same time as stronger growth translates to a pure double-lift to the bottom line," says C. Michael Aho, senior international economist at Prudential Securities Inc. That's a welcome result in any language.