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The Essential King Dollar/Low-Energy Nexus
The strong May jobs report — including a 280,000 jump in non-farm payrolls — reminds me of the big debate over the harmful effects of a strong dollar and falling oil prices. But where’s the harm? King Dollar, along with the supply benefits of the oil-fracking revolution, may actually be propping up a subpar economy facing headwinds from heavy business taxes and overregulation.
The entire cost structure of American business benefits from lower-cost imports and the cheaper purchase price of anything when the dollar is king and energy costs sink.
American firms become more competitive. And consumers benefit from rising real incomes in response to the energy-price collapse. And it’s not only energy. King Dollar strengthens consumer purchasing power across the board.
This whole wage debate around the Federal Reserve incorrectly focusses only on average hourly earnings, which are up 2.3 percent for the year ending in May. But wait a minute. If you’re going to use hourly earnings, you have to add hours worked, which in the aggregate are up more than 2.6 percent over the past year. That yields a near 5 percent increase in worker wage income.
And because of the disinflationary effects of King Dollar and cheaper energy (the consumer price deflator is flat), the near 5 percent gain in worker wages is all real. So consumers have a lot more spending power than most economists believe. Car sales jumped by about 18 million in May. A harbinger of better retail sales?
So don’t be led astray by the pessimists. The U.S. economy is absorbing the strong-dollar/low-energy nexus with very little difficulty.
Even in the financial sector, where a number of marginal energy companies issued junk bonds, we haven’t seen the negative systemic effects on the banking system that the hedge-fund managers predicted. Bank stocks have been rallying of late, including a near 3 percent gain last week despite a 1 percent loss in stocks overall.
Now, I don’t deny some short-run negative effects from the high-dollar/low-energy play. As crude oil dropped 43 percent and King Dollar increased near 20 percent, the economy shed 2,600 jobs from oil and gas extraction and another 38,000 from total energy support services. But this is a tiny fraction of the 3.1 million jobs created over the year.
The dollar-energy pessimists also point to a negative King Dollar effect on exports and multinational profits. There may be some impact here. But let’s not forget the recessions in Europe and Japan and a weakening China. So a 2.3 percent increase in real exports is not a bad number. And when the dollar is worth more, every other export business cost is cheaper.
And yes, there has been a roughly 11 percent loss in international profits. But the story here is that the so-called currency translation effect is an accounting fiction. U.S. dollars are left overseas where they are taxed at a much lower rate than if they were repatriated. (This, of course, is part of the corporate tax problem we have.) Meanwhile, over the past year, core domestic nonfinancial profits from the GDP accounts are up 7.5 percent and overall pretax profits are up nearly 4 percent. Not fabulous, but not bad.
And when you look at the macro picture against the backdrop of King Dollar and low energy, it’s still subpar, but it’s not getting worse. The four-quarter change in real GDP is 2.7 percent. The S&P 500 over the past year is up 8 percent, with the Nasdaq gaining 18 percent. The inflation rate is nil. And jobs are growing at a steady 2 percent pace.
And what happens when Washington policy finally delivers tax and regulatory reform? The King Dollar/low-energy scenario becomes a great economic backdrop. The combination of a strong dollar, light regulation, and lower marginal tax rates sets the stage for 4 to 5 percent growth, which will get the U.S. economy back to its long-term trend.
This brings me to an interesting final point. You don’t hear much about the dollar on the campaign trail. But Ira Stoll (Future of Capitalism) and Seth Lipsky (New York Sun) point to a possible Jeb Bush sound dollar, which would be the exact opposite of the crumbling greenback and skyrocketing gold and energy prices that occurred under his brother’s administration.
In a recent TV interview, the former Florida governor said: “You can make a case that in the last few years, given our monetary policy, that we’ve been manipulating our currency. We’ve never had a time when our central bank is just printing money like nobody’s business. And that depreciates our currency.”
Well now. Jeb is certainly on the right track. Let’s hope the other candidates follow along. For a million reasons, sound money is crucial to economic growth.
Published in Economics
Except people are individuals. So aggregating and claiming that there are more hours worked does not mean each individual worked more hours, it can easily mean- and likely does mean – more people are working part-time, and that few individuals are actually working more hours and making more money. More (disposable?) goods get bought at retail, but the middle class is still hurting, unable to get ahead. But I guess that’s not considered much of a problem with investment wonks.
But let me ask a larger question: What the heck is this wonkery good for? I have cable. I could tune into CNBC or read the Wall Street Journal if I want this kind of information. I really don’t think Ricochet is the investor class target audience, judging from the number of comments these kinds of posts get. I don’t think many here are much interested. And that goes for Larry as well. He hasn’t interacted with us here. There’s not much of a discussion/conversation.
What’s the point?
Hey Come on Ricos! Larry has posted! Let’s have a discussion! Last one in is a rotten egg! Oops! CoC violation?
I understand. Too often, Larry Kudlow and James Pethokoukis sound like Mortimer Duke in Trading Places (“Turn those machines back ONNNN!!!”) when it comes to pounding on economic issues and themes.
This post is no different.
Of course, these two gentlemen (along with many others) have nasty attitudes toward sites like ShadowStats, which only exacerbate things. So Ricochetti, let’s ask your thoughts on ShadowStats.
Well Franco, get the discussion going. Show Larry he is wrong. You made assertions in your post with absolutely no data, just your speculation. If it is “most likely” just a result of additional part timers, you should be able to demonstrate that pretty easily.
Big Green,
I’m not saying Larry is wrong (or right). I’m saying Larry is out of touch with the Ricochet rank and file, and is speaking to the investor class, with little concern seemingly ,to the middle class, a much more pertinent ‘class’ when it comes to politics.
My assertion is at least as good as his where I say that these things may look good from Larry’s perch, but the regular guy and gal are not seeing their individual paychecks or working hours increase.
I have confronted (if that’s the word) LK on immigration, and he has not deigned to weigh-in or back up his claims. He posts and runs. It is a mirror of his general attitude. He’s the big shot, telling us the what’s what. These posts, combined with his views on immigration and his fealty towards JebBush and lack of participation while taking up cyber real estate, make him fair game for ridicule as another ‘Mortimer Duke” as Brad says above.
That_few_here_are _interested, as we see by the number of comments and general lack of discussion, deters not the Rico PTB in the least, which I believe reflects badly on this site, especially since it is billed as_a_place_for_conversation.
It’s way more center than right and we can see how the squishycenter acts towards the rest of us. I have no worries I’ll hurt his feelings-he doesn’t read comments.
Franco – Fair enough. I have no interest in defending LK as he needs no defending. That said what seems to displease you about him is that he doesn’t participate in the discussions following his posts. Different strokes for different folks but I hardly think that is an indictment of ricochet.
Further, Larry presented data to back up an assertion he made about improved wages that may be better than generally believed. You seem to disagree but haven’t shown any data to back up you assertion that these improved annual wages aren’t accruing to real individuals. I just assumed since you had some strong feelings on the subject you would have some data to support it.
Larry is an advocate of plain old classical economics, which is good for both Main Street and Wall Street – and (if done right) not so good for K Street. This is what Reagan was aiming for.
If Jeb supports sound money, that differentiates him from his brother and makes me slightly less opposed to him.