Several weeks ago, in my post Troubling Signs for the U.S. Economy and its Corporations, I made two points:
- In addition to the U.S. consumer struggling at home, consumers across the globe (especially in Japan and Europe) have begun to feel strain, resulting in decreased foreign demand for U.S. goods and services.
- The U.S. dollar has rallied significantly in recent weeks impacting the foreign sales of U.S. firms.
Janet Yellen (President of the San Francisco Fed) echoed this sentiment in a speech she gave Thursday in Salt Lake City (see The U.S. Economic Situation and the Challenges for Monetary Policy, hat tip CR):
…export growth alone contributed one-half of the total real GDP growth [3.3%] registered in the second quarter. This element has been an important source of strength in our economy for over a year, being buoyed by strong growth abroad and by the weakening of the dollar. However, as I discussed, in recent months the dollar has risen somewhat and economic growth in many of our industrialized trading partners has slowed or even turned negative, suggesting that we can no longer count on exports as an important source of strength.
This is one of the effects that I spoke of in my previous post. However, it goes further. I would submit that not only will exports from the U.S. suffer, but the foreign sales of U.S. multinational affiliates will likewise suffer. Again, they will be impacted by the slowdown in the demand in the countries in which they operate, thereby decreasing profit. They will likewise be adversely impacted by the strengthening U.S. dollar as they repatriate income and report consolidated earnings in U.S. dollar equivalets.
For these reasons, and more, I am not seeing a rebound in corporate profitability for U.S. domestic or multinational firms in the 2nd half of 2008.
Disclosure: No positions.