Monday, November 3, 2014

No wonder the dollar is up

One way to think about the value of the dollar is that it's like the price of admission to the U.S. economy. The more attractive the economy looks, the more a ticket ought to cost. That's what is happening to the dollar today, because on at least a few fronts, the outlook for the U.S. economy is improving.

According to the Institute for Supply Management's October manufacturing survey, the economy's growth rate may finally be ramping up a bit from the sluggish 2.3% which has prevailed for most of the past five years. The October ISM manufacturing survey was stronger than expected (59 vs. 56.1), and as the chart above suggests, that is fully consistent with overall GDP growth of at least 3-4% in the current quarter. 4% is probably too much to hope for, but 3-3.5% would be a good deal better than what we've seen so far in this business cycle expansion.


The New Orders subindex of the ISM survey was especially strong. As the chart above shows, it has only been stronger about a half dozen times in the past 15 years.


Manufacturing conditions are clearly much better in the U.S. than in the Eurozone, as the chart above shows.


As the chart above shows, the 52-week moving average of container shipments via railroad is up a strong 6% in the past year, and has clearly surpassed the pre-recession high. This is physical and very real sign of increased economic activity.


In a similar vein, the physical amount of goods hauled around the country by trucks (truck tonnage) hit an all-time high in September, up 3.75% in the past year. As the chart above shows, this is fully consistent with the improvement we have seen in equity prices. A growing economy naturally leads to rising equity valuations over time.


In inflation-adjusted terms, in the past three years the dollar has gained almost 20% against other major currencies. But as the chart above shows, that still leaves the dollar below its long-term average value. The dollar is still somewhat weak, from a long-term perspective, but it has regained a considerable amount of its former value in. This confirms the good news that we are seeing in the manufacturing, rail, and trucking sectors. A stronger dollar will help keep inflation low, and at the same time it tells us that the world is now more disposed to invest here. Stronger investment flows will help strengthen the U.S. economy in the years to come—it's a welcome and virtuous cycle.

3 comments:

Benjamin Cole said...

Excellent review by Scott Grannis.

Not so sure I like the strong dollar---between weak oil and a strong dollar, we could see US oil production eviscerated.

Tourism, already hurting from post 9/11 security hysteria, could hurt even more.

Domestic manufacturing has been okay, but only with a dollar that gives U.S. factories even footing. A strong dollar, and that toehold could give way.

Mostly, there is no reason to pursue a strong dollar, when deflation is in the offing. Japan showed what happens when a nation pursues a strong currency. It is a monetary noose around the economy's neck.


Matthew Grech said...

The evisceration of US oil production is exactly what the Saudis were going for when they recently dropped the price for the US. All the shale guys are busy reworking their spreadsheets and likely aren't too pleased with the prospective returns. I guess the good news is that oil doesn't have much further to fall to get to its long term relationship with gold. (It had been seriously overpriced a few months ago.)

William McKibbin said...

I echo Matthew's comments...