The Strong Dollar And U.S. Earnings

It is a very relevant topic: how the strong U.S. dollar will hurt the profits of U.S. companies.

Whereas there are many positives to the U.S. having a very strong dollar, there are reasons why some people might not be so happy with the situation.

We read in the Financial Times that “for U.S. companies that generate a big chunk of their earnings overseas, the greenback’s gain has become a serious pain.”

Reason?

“A strong buck not only makes their goods more expensive overseas, but revenues earned abroad also get dinged when converted back into dollars.”

“Even with currency hedging, the earnings pressure will remain.”

This is true for U.S. companies in general because about 30 percent of their sales are from outside the United States.

But, the situation is even worse for tech companies.

Tech companies generate about 50 percent of their earnings from overseas.

So the tech companies will be hurt even worse that will the “normal” companies.

The Historical Scheme Of Things

The interesting thing about strong currencies and company performance is that in the past, countries that supported strong currencies produced companies that were highly productive.

In fact, these “strong currency” countries were known for their companies that were “highly productive.” In other words, countries with “sound” monetary and fiscal policies created an environment in which their companies emphasized creative and innovative organizational performance so as to be more productive than companies producing the same goods and services in other countries that relied on “weak” currencies to stimulate business.

Countries whose policies stressed “weak” currencies seemed to contain companies that relied more on the government’s currency policy to achieve sales, rather than on the productive quality of the goods.

Countries with strong currencies generally had productive companies that produced better quality goods. This made up the difference.

So, advocating for a country to maintain a strong currency, fundamentally meant that one was advocating for the country to be highly productive and innovative. The country was to produce higher quality products.

Note, that such a country works hard at strengthening the “supply side” of the economy and not just trying to generate demand by manipulating prices or demand.

The New World Of Information Technology

But, note that the Financial Times article emphasized that 50 percent of the earnings of tech companies come from overseas. In this day and age, the general reference to “tech” companies generally asserts that the “tech” companies have something to do with information technology.

And, when we get into the field of information technology, we get into all different kinds of issues, one of the greatest being our inability to account for and to measure how “information” contributes to the productivity and growth of the country.

There is not the time to get into this space too deeply, but just let me say that there is a huge amount of research going on right now about how the use of information as capital is changing our world.

Two sources I would recommend for you are: “Building the New Economy: Data As Capital” by Alex Pentland, Alexander Lipton, and Thomas Hardjono (2021: The MIT Press); and “Social Physics” by Alex Pentland (2015:Penguin Books). Pentland is a professor at MIT, creator of the MIT Media Lab, directs its Human Dynamics Lab, and co-leads the World Economic Forum Big Data and Personal Data initiatives. Forbes named Pentland one of the seven most powerful data scientists in the world.

Economists define the production function as the technological relationship that can generate the output of real goods and services. Up until recently, the production function included labor and capital as the resources that need to be combined to produce output.

Now, Mr. Pentland and others are including, within the production function, data as capital.

The argument is that data are now central to the economy, government, and health systems. Hence, data must be included in the production functions that define the output of the productive process.

One of the important characteristics of the use of data is that it can serve as the foundation for networks and platforms and can be increased at zero or close to zero marginal cost.

A consequence of this is that cost relationships can look a lot different now than they did in the past. The “old” statistical relationships just do not hold anymore.

The point of this is that we may have to revise the way we look at things because these things just don’t produce results as they did in the past.

One special situation that I have discussed in the past is the performance of labor productivity growth during the economic expansion running from July 2009 to January 2020.

The growth of labor productivity during this time period was less than one percent a year, and for quite a few periods, it was close to zero or even negative.

Our old definitions or our old systems cannot explain this.

Yet the period produced a growth rate in the economy that was around 2.3 percent per year for the whole time under review.

More and more analysts are coming to believe that this performance was achieved because “data” or “information” was a big part of the productive structure and was a vital component of the achieved results.

The Information Age

More and more people are talking about this being the “Information Age.”

Well, as a consequence, we have to build, more and more, the factor of data or information being a major component of our productive base.

And, we have to accept the way data or information can be incorporated into our analysis.

I started off this post talking about how the strong dollar could hurt the economic growth and profits of companies in the United States that obtain a large portion of their earnings from foreign sales.

The argument was that with the higher dollar, firms would have to produce goods and services more productively to be able to maintain profits in this highly competitive world.

There are questions about the ability of U.S. producers to achieve these productivity gains at this time.

I am arguing that the world has changed, and data capital is more of a part of the production of goods than ever before. The production of productivity has changed and the United States can make use of this even with the presence of a very strong U.S. dollar.

In this, I agree with the conclusion of the article in the Financial Times:

“The strong dollar may serve as a handy excuse for disappointing earning results.”

“Investors would do well not to accept such a defense at face value.”

Information is spreading and growing.

Data capital contributes to the expansion of innovation and change. To the enlargement of productivity.

“Analysts see earnings per share from S&P 500 companies toughing $218 this year, then climbing to $259 in 2024, up nearly a quarter from 2021.”

This is what the United States must shoot for.

It is a supply-side source, but it is very productive and very lasting.