Why the dollar will spoil the 5% GDP party in 2015

December 23, 2014, 9:53 PM UTC

All of a sudden, the U.S. economy appears to be cashing in.

On Tuesday, the government reported that GDP rose 5% in the third quarter. That is 1.1 percentage points better than the government’s earlier estimate, and it was the fastest rate of quarterly economic growth in more than a decade.

The report was yet another sign that the U.S. economic engine, after years of just barely making it up the post-recession hill, is finally chugging along.

And there was indeed a lot of good news in Tuesday’s report. Consumers were opening up their wallets wide again. Corporate profits grew more than previously thought. And corporate spending, what the government calls non-residential investment, was up a good amount as well.

That had a lot of people cheering that the prospects for the U.S. economy in 2015 were looking good. “The risks are around,” says Robert Eisenbeis, a top economist and Fed watcher at Cumberland Advisors. “But we have been living with these risks for a while and doing just fine.”

The economy is certainly better than it was just a year ago. But does it really feel 5% good? So far this year, the U.S. labor market has created an average of 240,000 jobs a month. That’s impressive, but it’s not 5% impressive. An economy growing consistently at 5% would be creating more like 575,000 jobs a month. We are a considerable distance away from that. And 5% GDP growth would put the U.S. in spitting distance to China, which, despite recent growing pains, is undergoing a major economic transformation.

And that’s the problem. A major contributor to the third quarter GDP growth figure was business from abroad. A smaller trade deficit—more exports and fewer imports—added 0.8 percentage points to GDP in the third quarter, or nearly 20% of the growth. It’s hard to believe the U.S.’s good trade news will continue, especially once we get into 2015.

First of all, the rest of the world’s economies appear to be slowing. And while the U.S. has continued to grow despite that, it’s hard to believe we can keep growing, especially at 5%, if the rest of the world is shrinking.

The dollar could pose an even larger problem. Over the past six months, the U.S. dollar has been up by more than 12% compared to a basket of international currencies. That makes it harder for U.S. companies to sell their goods overseas. That was a little bit of a drag in the third quarter, when the dollar started to appreciate, but it could turn into a major headwind in 2015.

The one piece of good news is oil prices, which dropped nearly 30% in the fourth quarter. Cheaper oil significantly reduces the costs of our imports, lowering the trade deficit. Lower prices at the pump also puts more dollars in the pockets of U.S. consumers, who can use that cash on other things. That should provide an economic boost, but perhaps not as much as some people think. If U.S. consumers spend those extra dollars on goods from abroad, which are now relatively cheaper, that will add to the U.S. trade deficit, making our 5% growth hurdle even harder to achieve in the coming months and years.

Read More

CryptocurrencyInvestingBanksReal Estate