The weak dollar already has led to a powerful surge in industrial activity across America's heartland. In fact, if the U.S. avoids falling into a recession in 2008, we may have the much-maligned dollar to thank.
Recent revisions to third-quarter GDP data showed growth of 4.9% vs. an initial estimate of 3.9%. The reason was an 18.9% annualized jump in net exports, which boosted GDP by a full 1.4 percentage points. That more than offset the decline in housing.
Fueled by the weaker dollar, exports were much stronger than expected. Goods exports alone increased a whopping 25% -- while imports rose just 4.3%.
Those who fret about the trade deficit -- which will exceed $700 billion this year -- will get to watch it shrink in coming years as this export boom continues.
What's more, this will continue to feed through to the U.S. economy, boosting domestic activity. The dollar's drop already has had an enormous hidden impact on the factory sector and corporate profits.
Most economists today believe that U.S. economic growth will be far weaker in the fourth quarter of this year and the first quarter of 2008.
But there already are signs of weakness, such as corporate domestic profits, which actually fell 4.2% during the third period, according to data from the Bureau of Economic Analysis.
Ordinarily that would be a disaster. But today, 31.5% of all corporate earnings come from foreign sources. Thanks to the weak dollar, foreign profits of U.S. companies are healthy. In the third quarter they surged 20%. So despite the decline in domestic profits, U.S. companies' net profits actually rose 1.2% in the July-September stretch.
The dollar should continue to bolster the economy at least through next year and maybe longer. Many economists expect the domestic economy to falter this quarter and in the first three months of 2008. But the weaker dollar will continue to underpin industrial activity.
American manufacturing already is booming. Since 2002, despite warnings of "deindustrialization" and a "hollowing out" of U.S. manufacturing, U.S. factory output of durable goods -- the sector most sensitive to changes in the dollar's value -- has surged more than 25%. Overall, factory output is up 16%.
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