Why US Manufacturers Don't Care About The Euro Crisis

It has been called the weakest U.S. recovery ever.

Battling a trillion-dollar deficit, a slowdown in China and an uncertain fiscal outlook at home, growth has been patchy at best, as one sector after another has experienced its own mini-drama of promise and disappointment.

On Thursday, the labor market became the latest area to dash earlier hopes, after jobs figures from payroll processor ADP showed that the private sector created 133,000 jobs in May, a mere 20,000 more than April and below economists' expectations of 148,000.

The economy is growing at an anemic pace and the job market is showing some signs of hesitation in the pace of hiring. There is a lot to worry about, Paul Edelstein, an economist at IHS Global Insight told Reuters.

But among the grim tidings, manufacturing has proven something of a bright spot.

According to the latest Manufacturers Alliance for Productivity and Innovation (MAPI) figures, the sector is expected to grow by 5.2 percent in 2012 and 3.3 percent in 2013 - outpacing overall GDP growth of around 1.9 percent this year.

Manufacturing, according to MAPI, continues leading the U.S. economic recovery.

However, that manufacturing sector now has to contend with a growing debt crisis in Europe.

As the risk of a messy Greek exit from the euro and the general breakup of the euro zone spark global slowdown fears, panicked investors have fled the troubled euro to safe havens such as U.S. treasuries and, crucially, the dollar.

On Wednesday, the greenback was trading close to a 22-month high against the euro, with the dollar index -- which tracks the dollar against a basket of six other major currencies -- up 0.58 percent.

Indeed, the flight to the dollar has been so strong that even gold -- the traditional safe haven of choice in troubled times -- has struggled to keep up, dropping 2.5 percent this week as the precious metal headed for its fourth monthly drop in succession.

The rising dollar is troubling for several reasons, chief among these the fact that in the past a strong dollar has hit U.S. exports hard.

For instance, only a decade ago during a similar dollar rise the U.S. trade deficit increased from $375.74 billion in 2000 to $450 billion in 2001 --roughly 4.5 percent of GDP -- as Americans switched to importing goods, and the rest of the world bought less from Uncle Sam.

U.S. Manufacturing Sector Expansion Can Survive Stronger Dollar, Weaker Euro

But far from predicting an end to the green shoots of recovery, this time around analysts are confident U.S. manufacturing can survive, even thrive, in the face of a falling euro and an appreciating dollar.

According to Chris Petrosino, Managing Director of Manning & Napier's Quantitative Strategies Group, a number of underlying trends will insulate the sector's nascent recovery from the rising greenback.

One of the main factors was the rise of near-sourcing as manufacturers move production back to the U.S.

Auto manufacturers in particular exemplify this trend, Petrosino said.

Choosing to build vehicles here in the U.S., companies making that decision save on transport costs, labor differential costs and the benefits of a shorter supply chain.

For these firms the euro would have to devalue significantly to overwrite these incentives.

For other key U.S. sectors such as the petrochemical industry, energy costs and availability have also played their part in alleviating the effect of a strong dollar.

One of the main benefits of being in the U.S. is the access to cheap energy, especially an abundance of natural gas.

Overall, Petrosino added, the dollar versus euro is not at the level that looks troubling for the initial stage of this [manufacturing] recovery.

On top of this, the steady appreciation of the Chinese Yuan -- coupled with rising wages -- makes the global outsource powerhouse a much less attractive environment.

And while recent global slowdown fears pushed the Chinese currency in May to its biggest monthly decline since 2005, the yuan is still up 1.97 percent over the past 12 months and 7.20 percent since June 19, 2010.

Indeed, if one takes a long-term view, the yuan has risen by 29.94 percent since July 2005 when China first announced exchange rate reforms.

U.S. manufacturers have also made good use of the evolving nature of the European debt crisis, according to Greg Michalowski, Chief Currency Analyst at fxdd.com.

This upward move of the dollar, especially against the euro, it's been well telegraphed with all the problems in the European countries.

U.S. exporters who are exposed to euro weakness and dollar strength would have looked to hedge some of their exposure in anticipation of such a move.

That's one of the things that may save manufacturers from the strengthening dollar.

After all, he added, the fundamentals for the Euro region have been getting progressively worse with little in the way of real solutions.

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