In changing global scene, strong dollar hurts profit of U.S. firms
Levi Strauss insists it had a much better 2015 than its numbers indicate.
That may sound like classic corporate spin, but in this particular case, the San Francisco apparel maker is absolutely right. The strong U.S. dollar wiped out about $312 million in sales from Levi’s books. Instead of reporting that adjusted operating profit grew 6 percent in 2015, the company said that profit actually fell 5 percent — due largely to currency fluctuations.
A strong U.S. dollar makes American goods more expensive overseas. In Levi’s case, the company pays its suppliers in dollars but sells the finished products in foreign markets in the local currency, which is often worth much less than the dollar.
As a result, Levi’s has raised prices in places like Mexico and Russia to cover the extra cost, a tactic that protects profit margins but might turn off customers. In addition, foreign tourists find their native currencies are worth much less in U.S. dollars and therefore do not visit America as much — or spend as much here if they do. Levi’s saw traffic “drop dramatically” last year in places like New York
and Florida, said Chief Financial Officer Harmit Singh.
The strong U.S. dollar does “make a difference,” Singh recently told me. “It’s difficult to offset. We are focusing on what we can control.”
Levi’s is hardly the only U.S. company feeling the pinch. Redwood City’s Oracle recently said that the rising dollar lopped off 4 cents per share from thirdquarter profit. Apple, which generates 66 percent of its annual revenue overseas, said that every $100 worth of sales outside the United States in the fourth quarter of 2014 translated into only $85 for the same period a year later.
Currency fluctuations are cyclical because they reflect the strength of individual economies, which go up and down. It wasn’t too long ago when people demanded to be paid in euros instead of dollars.
But the current supremacy of the dollar suggests an alarming imbalance in the global economy. The U.S. econ- omy grew a respectable 2.4 percent in 2015. The rest of the world looks decidedly bleaker: China’s economy is rapidly slowing. Falling oil and commodity prices have wrecked the economies of emerging nations like Russia and those in Latin America. Europe continues to stagnate.
“We're seeing extreme conditions unlike anything we've experienced before, just about everywhere we look,” Apple CEO Tim Cook recently told analysts during a conference call.
For Standard & Poor’s 500 companies that generate most of their sales outside of the United States, profit was down 11.2 percent in the fourth quarter of 2015, according to a report by FactSet. By contrast, companies that generate most of their sales in the United States saw earnings rise 2.7 percent in the same period.
Though it is the world’s largest and most dynamic economy, the United States can’t continue to prop up the rest of the globe, especially when it is still recovering from the Great Recession of 2008. Some economists believe the crisis, the worst economic downturn since the Great Depression, has fundamentally altered the American consumer, long the world’s economic engine.
U.S. consumers are never going to return to the debt-fueled buying sprees that powered previous economic booms, said Steven Fazzari, associate director of the Weidenbaum Center on the Economy, Government and Public Policy at Washington University in St. Louis.
John Williams, president of the Federal Reserve Bank of San Francisco, recently said the United States should expect to see 3 to 3.5 percent growth in the 2020s, instead of the 4 to 4.5 percent the country enjoyed in the 1990s.
“I warned about the risk of a ‘new mediocre’ — low growth for a long time,” International Monetary Fund managing director Christine Lagarde told a conference last year. “Today, we must prevent that new mediocre from becoming the new reality.”
To jump start the global economy, something big needs to happen. The United States and a dozen countries in Asia recently completed a sweeping free-trade deal that would liberalize 40 percent of the world’s economy, although the pact has run into fierce resistance in Washington. A U.S. investment treaty with China and free-trade deal with Europe are also still on the table.
Trade deals are controversial, because critics say the agreements cost U.S. jobs and erode wages. But one thing’s for sure: Just selling stuff to American consumers isn’t going to cut it anymore.
Though it is the world’s largest and most dynamic economy, the United States can’t continue to prop up the rest of the globe.