December 4, 1998


The Dollar and U.S. Manufacturing, the latest edition of the New York Fed’s Current Issues in Economics and Finance, is enclosed for your review.

U.S. manufacturing industries are becoming increasingly sensitive to changes in the international value of the dollar, according to authors Linda Goldberg and Keith Crockett.

Drawing on recent studies that examine how dollar movements have affected past industry performance, Goldberg and Crockett argue that the dollar’s 1997-98 appreciation could significantly reduce U.S. producers’ profits. In addition, the stronger dollar could prompt manufacturers facing a reduction in profit to scale back their expenditures on new plants and equipment.

Goldberg, an assistant vice president in the International Research division, and Crockett, a former assistant economist in the division and now a student at Columbia Business School, also cite some evidence that a dollar appreciation could depress wage growth and affect employment patterns. Although research does not conclusively show that a rise in the dollar leads to job losses or cuts in worker hours, there are indications that a strong dollar may contribute to "churning" within industries--a phenomenon in which large numbers of workers lose their jobs but go on to find new jobs.

To establish that U.S. manufacturing is now more vulnerable to a dollar rise, Goldberg and Crockett use a new measure called net external orientation. This measure gauges the extent to which an industry is exposed to exchange rate shifts through its reliance on export markets and its use of foreign parts and equipment.

Using the net external orientation measure, the authors determine that the exchange rate sensitivity of U.S. manufacturing more than doubled between 1984 and 1995. They also find that tobacco products, industrial machinery, electronic equipment, and measuring and recording instruments are the industries most likely to be hurt by a stronger dollar.

Contact: Douglas Tillett

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