The Costs Of A Gyrating Dollar

How seriously will the dollar's recent gyrations affect the U.S. economy in the months ahead? According to some observers, less than you might think. They point out that imports accounted for only 12 cents of every dollar spent in the U.S. last year and that the take from exports was even less.

Jack L. Hervey of the Federal Reserve Bank of Chicago observes, however, that such broad comparisons are misleading. In the manufacturing sector of the economy, trade flows now play a critical role, influencing both output and inflation. Exports of U.S. goods as a percentage of domestic output of goods measured in 1987 dollars, for example, have jumped from 8% in 1960 to 24% last year. In the same period, the import share of total goods consumed in the U.S. surged from 6% to 28%. In the case of durable goods (chart), one finds that a third of such goods produced in the U.S. are now exported, while imports have captured nearly 40% of the domestic durable-goods market.

Despite these trends, Wall Street seems to be shrugging off the dollar's recent rise against the peso and the Canadian dollar and its decline against the yen and the mark. Lower dollar prices of imports from Mexico and Canada are evidently expected to offset higher tabs for European and Japanese goods, while stronger demand for U.S. goods in Europe will make up for diminished demand in the Western hemisphere.

Economists at Chemical Securities Inc. disagree. They note that much of U.S. trade with Canada and Mexico is in dollar-denominated goods--either raw materials or items that are exported in semifinished form (autos and maquiladora products) and then shipped back to the U.S. Thus, they claim, the decline of the Canadian dollar and the peso will offer little relief from inflationary impulses resulting from the dollar's weakness.

At the same time, more demand for U.S. products in Japan and Germany will be a mixed blessing, says L. Douglas Lee of NatWest Washington Analysis. That's because many U.S. exporters to those nations, in industries such as information technology and instruments, are already at full capacity. "Both on the import and the export side," says Lee, "the falling dollar is likely to generate inflationary pressures."

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