A too-strong currency is, in theory, supposed to make it harder to sell things
to cheap-currency countries, thus crimping corporate profits and by implication
pretty much everything else.
The US dollar has been rising against the rest of the world for over a year,
so let's see how we're doing. From today's Wall Street Journal:
Falling
Corporate Profits Blur U.S. Growth Outlook
Profits at U.S. companies during the third quarter posted their largest
annual decline since the recession, underscoring the competitive pressure
from a strong dollar and weak global demand that could limit businesses'
ability to support stronger economic growth in the coming months.
A comprehensive measure of companies' profits across the U.S.-earnings adjusted
for inventory and depreciation-dropped to $2.1 trillion in the third quarter,
down 1.1% from the second quarter, the Commerce Department said Tuesday.
Compared with a year earlier, profits fell 4.7%, the biggest annual decline
since the second quarter of 2009. That marked only the second time profits
have fallen on a year-over-year basis since the recession ended in mid-2009.
Economists warn weak profits could weigh on business investment, put pressure
on stock prices that some analysts think look expensive, and pose a challenge
for Federal Reserve officials who are trying to raise interest rates after
seven years of near-zero rates.
"Profits are slowing, there's no way around that," said Deutsche Bank chief
U.S. economist Joseph LaVorgna. "These are things that suggest we're past
the midpoint of the business cycle, unfortunately, but it doesn't mean we
can't run this [expansion] a bit longer."
U.S. companies' profits plunged during the recession then rebounded in the
early stages of the recovery. But they've been trending lower for years,
a reflection of slow growth abroad and moderate growth at home. Profits as
a share of overall economic output have shrunk to 11.4% in the third quarter
from a recent peak of 12.5% in 2012.
The latest reading highlights the divergence between domestically oriented
operations and U.S. companies' overseas operations, where the stronger dollar
has effectively made U.S. products more expensive and global weakness has
undercut demand.
Tuesday's report showed domestic profits rose $7.3 billion in the third
quarter, or 0.4%, but fell 2.8% from the third quarter of 2014. Meanwhile,
foreign profits fell by $30 billion, a 7.4% decline from the second quarter
and 12.2% drop from a year earlier.
We are indeed following the currency war script. And since most major trends
- spreading Middle East war, several different kinds of chaos in Europe, an
emerging credit crunch in China, a rising Fed Funds rate in the US - point
to an even stronger dollar in 2016, it's safe to predict that corporate profits
will keep falling.
The question then becomes, at what point do falling profits become the dominant
story for stock market investors? Right now, the markets are focused on foreign
capital inflows and central bank liquidity, and have concluded that slightly
less profitable corporations are still better bets than most other investments.
But what happens when "slightly less profitable" becomes "dramatically less
profitable" or "unprofitable?" We'll find out shortly.
