The big hit from the strong dollar is going to fall on small U.S. exporters.
While large U.S. multinational corporations have kicked up a storm of complaints about the currency’s advance, their broader customer and production bases make them more nimble and able to cope. For the smaller counterparts with fewer products to offer and most factories in the U.S., it’s becoming more difficult to remain competitive.
The swift and sizeable appreciation of the dollar “is a hard knock for any company, and it’s harder for small exporters,” many of which sell specialty products often less than $1,000 a shipment, said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington. “The short-term outlook is painful.”
Companies employing fewer than 500 workers accounted for about a third of the $1.6 trillion in goods sold overseas, according to 2013 data released by the Census Bureau on April 7. Six out of 10 shipped their products to just one foreign market, and 92 percent operated from a single location.
The dollar’s surge of about 25 percent since mid-2014 is making American-made goods more expensive to foreign buyers and imports cheaper, stoking competition. For small firms the squeeze is inescapable, and it’s only just beginning.
“It is harder for us to now get those customers,” said Greg Smith, vice president at Freund-Vector Corp., a maker of equipment used in processing medicines and powders. “We sell 50 to 60 systems a year, so even losing two or three sales could be devastating.” The Marion, Iowa-based company relies on exports for 70 percent of its $40 million in annual revenue.
Factory output barely climbed in March, Federal Reserve figures showed Wednesday. A 0.1 percent gain in manufacturing was the first advance since November. Production slumped at a 1.2 percent annualized rate in the first three months of the year, the biggest drop since the second quarter of 2009, just as the recession was ending. Another report showed homebuilder confidence rose in April for the first time in five months.
After reaching a record in July, sales of American-made goods abroad dropped in six of the following seven months to reach an almost four-year low in February as a labor dispute at West Coast ports accelerated the slump. The declines cast a bigger shadow than exports’ 13 percent share of the economy would suggest.
The dollar’s rise may cut U.S. growth by about 0.5 percentage point this year, economists at Bank of America Corp. and Goldman Sachs Group Inc. project. Emanuella Enenajor, a senior economist at Bank of America in New York, estimates that could reduce payrolls by about 30,000 to 60,000 a month.
“The bulk of the impact is yet to come,” said Enenajor. “We really haven’t seen much of the drag for now. These are risks that take time to materialize.”
About 98 percent of the roughly 304,000 American firms with foreign customers in 2013 were small and medium-sized. While they accounted for 33.6 percent of U.S. exports in 2013, companies based in California, Texas, New York and Florida were among those that exceeded the national average, according to the Census Bureau.
Complying with government regulations is burdensome for small exporters, many of which also buy materials domestically so they’re not benefiting from lower import costs, said Peterson’s Hufbauer. They have less flexibility to hedge the currency’s swings or delay orders, and lack the offshore locations that make it easier to switch between markets or park profits abroad.
In the long run, these firms “can gradually adjust,” Hufbauer said, though “they have to first get through a tough patch.”
Global growth is uneven, and on the U.S. front, policy makers are haggling over a reauthorization of the U.S. Export-Import Bank beyond June and fast-track authority for President Barack Obama to negotiate the Trans-Pacific Partnership trade deal.
“We certainly have had some headwinds, but what’s relatively new is the stronger dollar, it’s an incremental challenge,” said Peter Bowe, president of Ellicott Dredges LLC, whose equipment helped build the Panama Canal more than a century ago and is being used now to widen the waterway that facilitates international trade.
The Baltimore-based manufacturer has about 250 workers, including 50 at production units in Europe, and gets more than half its sales from nations such as Chile, Egypt, and Bangladesh. Its multiple markets and overseas factories put it among the more fortunate small businesses able to adjust.
Shrinking government budgets are limiting demand for dredges for infrastructure projects in developing nations and should the dollar’s ascent worsen the outlook, “I’d want to be pre-emptive,” Bowe said.
Ellicott may reduce the exposure to the greenback by buying or making more parts overseas, he said, though that “would potentially hurt our vendors in the U.S.”
Such negative spillover is what worries Mark Muro, policy director of the Metropolitan Policy Program at the Washington-based Brookings Institution. “The impact gets amplified, to job growth, output, the whole chain of multipliers.”
Every $1 billion of exports supports almost 5,800 jobs in the U.S., according to government estimates. Researchers reckon workers in export-intensive industries earn 16 percent to 18 percent more than others on average.
The dollar may get another leg up as U.S. growth improves and Fed monetary policy diverges from other nations’, said Dan North, the Ownings Mills, Maryland-based chief economist at Euler Hermes, North America’s largest provider of trade-credit insurance.
“It’s a headwind that can’t be escaped,” he said. “Most of the world is in 1 to 2 percent growth land.”
Companies with niche products that can’t be quickly replaced will be relatively shielded, and smaller exporters are unlikely to take losses because they typically withhold shipping until their products are paid for in full, North said. Still, “there’s less cushion” because insurers may decide to charge small-business suppliers more as the risk to exports climbs, he said.
At Henry Molded Products Inc. in Lebanon, Pennsylvania, “this exchange rate is an additional pressure,” Chief Executive Officer Doug Henry said, adding that 5 percent of sales come from exports, mostly to Canada and Mexico. “Now we have to be able to show an extraordinary differential in the value of our product.”
The company, which employs more than 100 workers, makes recyclable molded-fiber products such as planters and packaging for everything from wine bottles to automotive equipment. The exporter’s foray into Europe in late 2006 and early 2007 was hindered by the subsequent global financial crisis, and it’s still an “abysmal European economy,” he said.
While the responses from potential customers at a trade show in Munich last month were encouraging, Henry said, without the greenback’s run-up “we’d be hitting doubles and triples instead of singles.”