The Manufacturing Midwest Likes a Weaker Dollar

Here in America’s heartland, the dollar’s most recent plunge is being greeted with glee.

The nation’s manufacturers, many of which thrive on exports, stand to reap major additional benefits from the currency’s recent fall in value against the Japanese yen and German mark.

The slumping dollar means U.S. goods will be even cheaper in important foreign markets, while imports into the United States will cost more, making domestic products more competitive.

“We will be laughing all the way to the bank,” said Gordon Richards, chief economist for the National Assn. of Manufacturers in Washington.

While the dollar has been falling in value for years against the yen and mark, its decline has accelerated sharply in the past week. The dollar tumbled Tuesday to record lows of 90.05 yen and 1.3702 marks.

One note of caution: The dollar has strengthened against the currencies of Mexico and Canada, the United States’ two largest trading partners, and exports to those markets--particularly Mexico--are likely to be curbed.

Some economists also fear that the currency situation may interfere with the continuing efforts by the Federal Reserve Board to cool the nation’s economy, particularly the buoyant manufacturing sector in the Midwest.

The concern is that the faster the nation’s manufacturing sector grows, the more likely the Fed is to raise interest rates to prevent the economy from overheating.

“The dollar’s decline is good news for heavy manufacturers but bad news for the Fed,” said Diane Swonk, economist for First National Bank of Chicago.

While the precise impacts of currency fluctuations are difficult to gauge, economists say the long-term decline of the dollar has already significantly affected the U.S. economy, consumers and corporate strategies--and will continue to.

Most major manufacturers, which led the nation out of its last recession, welcome the lower dollar. These companies--makers of autos, machine tools, chemicals, steel, electronics and other goods--see opportunities to expand or become more globally competitive.

Consider Caterpillar, the world’s largest producer of earth-moving and construction equipment. The Peoria, Ill.-based company had record 1994 exports of $4.5 billion, up 21% from 1993.

The company is expecting “modest improvement” in export sales and profits this year, particularly in Europe and Japan, where the economies are recovering from recessions. A lower dollar can only improve Caterpillar’s outlook.

“There are opportunities in some of these growth areas,” spokeswoman Marsha Hausser said.

The chemicals industry, which sells everything from paints and pesticides to pharmaceuticals and resins, has benefited in recent years from a lower dollar. In 1994, the industry exported $341 billion worth of goods, more than any other U.S. manufacturing sector.

Kevin Swift, economist for the Chemical Manufacturers Assn., said a 10% decrease in the dollar against other currencies would result in a 1.7% increase in exports. “The dollar’s decline--if it lasts--should increase exports,” he said.

Machine tool makers could also get a boost from a lower dollar. The industry was greatly hurt by Japanese and German competition in the 1980s, but the U.S. survivors have modernized and become world-class competitors.

John Townsend, spokesman for Giddings & Lewis in Fond du Lac, Wis., said a weaker dollar should make the company more competitive in Japan and Germany. “But in practice it doesn’t always work out that way,” he added.

One reason: Giddings & Lewis, which had exports of about $30 million last year, has had difficulty making inroads into the Japanese market because of what Townsend called “invisible barriers.”

Some machine tool makers worry that a weaker dollar will prompt more Japanese and German competitors to move production to the United States to counteract the impact of their stronger currency.

For U.S. auto and steel makers, a weakened dollar is unlikely to result in substantially more exports, because those industries already have domestic products limits and facilities abroad. But they will have lower costs than foreign competitors importing to the United States.

The weak dollar has given the Big Three auto makers a price advantage of as much as $2,000 per vehicle over imports--a key reason why most Japanese and German auto makers are adding to capacity in the United States.

For instance, Toyota plans to increase its U.S. and Canadian production from 580,000 vehicles last year to 968,000 in 1998. Toyota spokeswoman Nancy Hubbell said the price difference has also prompted the company to seek ways to become more efficient and reduce the cost of building a car by up to 30%.

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Dollar’s Fall

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