The financial news outlets have run a variety of pieces on the growing strength of the U.S. dollar as compared to other foreign currency such as the Euro or the Japanese Yen, but this development is already exerting a negative impact on the small business community.
The stronger dollar means that the importation of American products is more expensive. This translates to “Made in the USA” products being less capable of competing with products made in China, Europe, and other emerging markets. The result has been a domino type of effect where the distributors of US made products located overseas are either placing smaller orders or seeking some type of price reduction to be able to move the inventory.
This scenario places the American small and medium sized business in an unenviable position of having to shave profit margin points in order to remain competitive in overseas markets. The reduction in profit margin often means that they have less money to reinvest into their business to either develop new products or new methods to produce goods as well as having less money to hire additional workers.
The news of the strengthening of the US dollar comes against the backdrop of a weak jobs report for the month of March. This forecast will look especially bleak when you consider that the majority of new jobs are created by small businesses, and they are dealing with a negative outlook on their respective profitability due to the stronger currency performance of the dollar.
I compare this situation to a negative feedback loop because it is all tied together and the consequences are serious for the small business community and the future of American manufacturing. I have read accounts of small business owners who remain committed to making their products in the USA, but they acknowledge that the currency outlook will force them to innovate and work with smaller head counts.
The labor outlook continues to be troubling not only for Wall Street but the Federal Reserve as well. The forecast for growth of better paying jobs as well as overall wage growth is an area of increased interest by the Fed in recent months. The majority of the American work force has not seen wages increase much, if at all, in recent years. The improvement in the economy was supposed to change that trend, but it has not.
The American economy went through several months of adding jobs in traditionally lower pay sectors such as retail and hospitality services. The real indication of an economy that is turning the corner is the addition of higher wage paying positions in a variety of other sectors, which would have a direct correlation to wage growth, but these metrics have been slow to develop.
Clogging the Engine
The American small business is the engine which gets the rest of the job market moving again, and I fear that the strengthening of the US dollar in the currency markets will have a negative effect on their profitability. This will directly impact their ability to hire more workers, which will have a widespread effect on the American labor participation rate.
The strong US dollar might be great for tourism because Americans can go and get significantly more value for their money in their European trips this spring and summer, but this will be offset by the ability of American small and medium sized businesses maintaining profitability. The economic realities of that change will have profound impact on the domestic economy through the rest of 2015.
(Some background information courtesy of CNBC.com and CBS Marketwatch.com)