3rd Quarter 2008

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Tailwind in a Hurricane: Can a Falling Dollar Help Tennessee Exports in 2009?

by Steven G. Livingston

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Finding light in the current economic gloom is a bit difficult. In the case of Tennessee's exports, it's currently a case of waiting for the other shoe to drop. Through November, the state's foreign sales have held up. But what will 2009 bring? Presumably a downturn, reflecting worldwide economic difficulties. What little good export news we get may likely come from the trajectory of the dollar in the coming year. The dollar, which had been providing a steady tailwind for exporters as it fell through 2007 and 2008, suddenly stiffened when the credit crisis hit this past October. Around the world, people sought refuge in the relatively safe greenback. In the two months that followed, Tennessee's dollar index gained almost 15%, and by December it had returned to 100 for the first time in over four years. (The index was set at 100 in January, 1998.) A tailwind quickly turned into a headwind.

Now for the good news, such as it is. Most experts believe this rise in the dollar will prove short-lived. An important survey by the UN's Department of Economic and Social Affairs actually predicts a rather steep fall for the dollar in the year ahead. The reason is that the forces that led a stampede back to the dollar should run out of steam, while the longer-term weakness of the currency should again come to the fore. Whatever one's larger views are about a weakening dollar, it has been historically good for American exports. To the extent that exports fuel economic growth, this is a positive.
The Federal Reserve Bank of New York has compiled trade indices for individual industries. Using these indices, we can get some sense of how each different industry responds historically to movements in the dollar's value. With this information, we can attempt to locate which Tennessee industries might be best positioned to take advantage of a falling dollar. Under current global conditions, one would be foolish to predict these industries will grow over 2009, but minimally we might expect the dollar's decline to attenuate their losses. Which industries are these?

At the end of this article are charts of the Tennessee industries we think benefit most from a falling dollar. Essentially, they are likely to be industries that export final products rather than those that send components or unfinished products overseas, to then return to the U.S. to be completed or assembled for sale in the North American market. Many of these latter exports are intra-firm and respond more to changes in U.S. demand than to global conditions or exchange-rate moves. In the case of Tennessee, for example, the transportation and rubber industries are not very responsive to changes in the dollar. In both cases, state exports are to a significant extent driven by eventual sales of cars in the U.S. and Canada. The state's computer and electronics industry falls into this category as well, though it also is an example of the second type of sector that doesn't appear very responsive to changes in the dollar. This is a sector where it is sometimes difficult to differentiate brands and where many foreign competitors invoice in dollars and can absorb currency fluctuations in their pricing decisions. A third type of export for which we don't find much influence from movements in the dollar is simply a product that, for whatever reason, is demand inelastic: buyers don't seem to be very sensitive to its price. In Tennessee, the best example is the beverage industry. Beverage exports here are mostly whisky exports. Look at the graph of this industry's exports versus changes in the value of the dollar. You can see that whisky sales rise almost every quarter, no matter what the dollar is doing. It simply isn't very price sensitive.

So what are we left with? The following graphs display the five Tennessee industries that appear to have been the most susceptible to changes in the value of the dollar over the past decade. We graph an export index for the industry (1998Q1 = 100) against the inverse of its dollar index over the past decade. The graph compares the change in the industry's exports to changes in the strength of the dollar. For each industry, we list the amount of that state industry's exports during the first three quarters of 2008 and its export growth rate over that same period. The third number is the estimated percentage impact on exports of a one-point change in the industry's dollar index. If the dollar falls by one point, how much does the export index rise? As already noted, one would hardly predict gains in these industries for the coming year even if the dollar falls. The exchange rate is not the only factor that influences foreign sales! The estimated impact is calculated from past performance, taking into account a variety of factors, and serves only to tell us which industries are most likely to get a currency boost in these bad times. Unfortunately, we may have to wait a while for something better than this modest help.