Wall Street JournalSurvey of 63 Economic Forecasters

The WSJ just completed its March survey of over 60 economic forecasters, and the results were a bit disappointing.  The forecasters, on average, expect the surging U.S. dollar and global weakness elsewhere will keep the economy slightly below 3% growth for all of 2015.

The survey respondents forecast first quarter GDP growth of only 2.3%, not much better than the 2.2% in the fourth quarter of last year. They think the economy will grow by 3.0%in the second quarter but by only 2.9% for all of 2015, versus 2.4% in 2014. They expect the unemployment rate to fall from 5.5% currently to 5.1%by the end of this year. 

On the question of when the first Fed rate hike will occur, over 80% believe it will come at either the June FOMC meeting or the September meeting – no surprise there. Almost two-thirds believe the Fed should raise the rate sooner rather than later. That seems very odd given that inflation is nowhere to be found. 

Consumer Spending/Retail Sales Turn Lower

To the surprise of just about everyone, consumer spending turned lower in December and January. Personal Consumption Expenditures (PCE) – the Fed’s favorite measure of how consumers are feeling – unexpectedly fell in January for the second consecutive month, and perhaps a third when we get the numbers for February.

Retail sales, for which we already have the February numbers, fell for the third month in a row. Retail sales fell 0.6% in February, 0.8% in January and 0.9% in December – all of which were considerably worse than expected.

After last year’s spectacular plunge in oil and gasoline prices, many analysts assumed that consumers would spend all of their gasoline savings on other things. Some overlooked the fact that even if you spend all your gas savings on other things, that still amounts to the same amount of spending.

Yet in reality, Americans on average did not spend all their gasoline savings on other things. Knowing there’s no guarantee that gas prices won’t go right back up again soon, many Americans have elected to sock away some of their gas savings, rather than spend it all. The US savings rate rose to 5.5% in January, the highest level since early 2013.

This explains why consumer spending fell in December and January (and likely February) and retail sales were down for the last three months, despite sharply lower gas prices. 

The Surging U.S. Dollar

The U.S. dollar has been trending higher since the bottom in early 2011. Since then, the dollar has gained approximately 33% against a basket of major currencies. The ICE Dollar Index (DXY), a measure of the US dollar against six major currency rivals, is up over 9% this year alone to trade at its highest level since late 2003.

The fact that the U.S. dollar is now higher than at any time in over a decade is attributed to various factors. Among them is the fact that the U.S. economy is the strongest among developed nations, even though the recovery remains rather feeble. As the old saying goes, the U.S. dollar just happens to be the best horse in the glue factory.

Another is the fact that rivals such as Japan and Europe are undertaking monetary policies (QE) that purposely undermine their currencies in misguided efforts to stimulate their economies. The euro, for example, fell to U.S. $1.05 last week, down 12.4% this year alone and down 24% over the last 12 months.

If this trend continues, and it appears it will, the euro could fall below parity with the U.S. dollar this year for the first time since 2002. Some analysts believe the euro is headed as low as 85 cents to the dollar before long. The Japanese yen is in even worse shape relative to the dollar.

Another factor buoying the dollar is the fact that the U.S. Fed is widely expected to raise short-term interest rates this year. Higher interest rates will make the US dollar even more popular among international investors. Strong inflows to the US dollar have been increasing over the last year, pushing the dollar higher and higher. This trend should continue for at least several more months, possibly longer. 

How the Stronger Dollar Affects the U.S. Economy

Generally speaking, a higher U.S. dollar makes foreign imports cheaper – we can buy more with the same amount of dollars, so that is good for the economy. This benefits U.S. manufacturers that purchase foreign goods and services to make their end products. On the other hand, a stronger dollar makes our exports more expensive to foreign buyers, so this is a net drag on the economy.

The good news, if we can call it that, is that U.S. exports account for only 13.5%of the economy, whereas imports account for approximately 16%. According to the Census Bureau, U.S. exports in 2013 (latest data available) were approximately $2.2 trillion, versus imports of approximately. $2.8 trillion.  So the net effect of a stronger dollar is slightly positive for the economy, despite what you may hear.

Yet a strong dollar can be both a blessing and a curse for the U.S. economy. On the one hand, it means cheaper imports, which consumers love. Families will save money on clothes, cars, electronics, coffee, some really delicious cheese and all sorts of other imported staples.

On the other hand, a supercharged currency will make it harder for us to sell our own goods abroad. While exports aren’t quite as crucial to our economy as they are to Europe’s, for instance, they’re still important. As they fall, or grow more slowly, it could cut into job growth. Some manufacturers could even cut jobs.

There are other benefits from a stronger dollar that are less easy to quantify. For example, if you are planning a trip overseas, the stronger dollar is good news. If you have to convert your dollars to a foreign currency, you will be able to buy more of that currency. Conversely, the stronger dollar makes it more expensive for foreigners to visit the U.S. 

Strong Dollar is Driven by Increasing Foreign Devaluations

The rising value of the U.S. dollar is more the result of foreign nations devaluing their currencies than it is to robust economic growth at home. It would be nice if the surging U.S. dollar was the result of a booming economy in America. While the U.S. economy is growing, the recovery is still the weakest in the post-war era.

Yet as noted above, the U.S. economy remains the least dirty shirt in the laundry basket. With foreign governments intent on devaluing their currencies, in misguided attempts to stimulate their economies, more and more foreign investors are choosing to park their money in U.S. dollar-denominated assets. This further strengthens the dollar.

Given that the European Central Bank has just embarked on a $1 Trillion QE bond-buying effort, and Japan has doubled-down on its QE program, we can only wonder how long it will be before China follows suit. It could well be that China decouples its currency from the U.S. dollar peg before long.

The point is the strength of the dollar is not so much that the U.S. economy is surging, but that foreign governments are choosing to devalue their currencies relative to the dollar in an attempt to stimulate their own economies.

So don’t be confused that the surging U.S. dollar is a sign that the U.S. economy is accelerating rapidly. It is merely a sign that the U.S. dollar is the least worst currency in which to park your money. With the economies of Japan, Europe and China on the ropes, this trend could continue for some time to come. 

Gary D. Halbert is the president and chairman of Halbert Wealth Management, Inc. His Forecasts & Trends Weekly E-Letter may be obtained free of charge by subscribing at www.halbertwealth.com