WILL THE WEAK DOLLAR CONTINUE TO PROVIDE BENEFITS TO NORTH CAROLINA? FIFTH DISTRICT REGIONAL ECONOMICS DEPARTMENT R A Y O W E N S S E P T E M B E R 2 0 0 4

THE ROLE OF TRADE IN THE ECONOMY… - The effects of trade are difficult to measure - Input/output multipliers range widely - Nonetheless, the impact of trade on North Carolina is apparent: As of 2004, about 80% of firms with over one hundred employees are involved in international trade according to the North Carolina Ports Authority As of 2003, North Carolina Exports were valued at over 16 billion dollars and were shipped out to over 200 nations And the U.S. Department of Commerce reports that exports support about a quarter million, high-paying jobs in North Carolina in 1997 -- about half of which are in manufacturing

THE EXCHANGE VALUE OF THE DOLLAR The value of the dollar depends on the attractiveness of holding dollars compared to holding another currency - Trade If more dollar-priced goods are desired on international markets, dollars must be obtained by purchasers -- driving up the value of the dollar Fewer dollar-priced sales means a lower dollar Of course, a change in the quality of foreign currency-priced goods influences that currency similarly - Capital If investment opportunities become relatively more attractive in the U.S., foreign investors want more dollars to invest, pushing the dollar higher If investing in the U.S. looks less attractive, the dollar falls

TRADE AND CAPITAL FLOWS THE ROLE OF THE VALUE OF THE DOLLAR… TRADE AND CAPITAL FLOWS A stronger dollar is associated with a weaker trade balance but a stronger capital inflow As the dollar weakens, the trade balance improves (with a lag), but capital inflows aren’t as strong But there can be “special circumstances” that make this relationship less apparent

CRUDE OIL PRICES Current Dollars per Barrel – August 2004 Spot Prices Futures Prices

US TRADE BALANCE (SA, BOP basis) & US TRADE BALANCE ADJUSTED FOR PETROLEUM IMPORT PRICES vs. TRADE WEIGHTED DOLLAR INDEX

N.C. MANUFACTURING EMPLOYMENT vs. TRADE WEIGHTED DOLLAR INDEX Month to Month Changes (thous.) MAR -1.6 APR -0.8 MAY -2.9 JUN 0.2 JUL 2.8

RICHMOND FED MANUFACTURING SURVEY Diffusion Index – 3 Month Average July 2004 14.0 July 2004 5.33

FOREIGN DIRECT INVESTMENT (SA, net flow) vs FOREIGN DIRECT INVESTMENT (SA, net flow) vs. TRADE WEIGHTED DOLLAR INDEX

SYNTHETIC EURO through July 2004 (calculated using 1997 GDP weights) Weaker dollar Stronger dollar

RICHMOND FED MANUFACTURING SURVEY vs. TRADE WEIGHTED DOLLAR INDEX

ISM - PURCHASING MANAGERS INDEX Index Level: 50+ = Expansion July 2004 62.0 AVG PMI 11/03 – 7/04: 62.27

THE BOTTOM LINE… - The recent stability of the dollar against the currencies of our trading partners appears to be a return to its long-term average value - The last several years of a strong dollar have been associated with a widening trade deficit and the loss of manufacturing jobs in North Carolina and in other manufacturing-dependent states - But the recent sharp decline in the dollar’s value has made U.S.-produced goods more affordable on international markets And some evidence suggests that the size of the trade deficit is - once the influence of oil prices is accounted for - driven both by a lesser value of imports and an increase in the value of exports If this improvement persists, demand for traded goods -- especially manufactured goods – should firm, leading to the possibility of further improvement in employment in the sector - Finally though, a sharp depreciation in the dollar is not a panacea Foreign investment inflows may weaken over time Cheap foreign goods may become less so -- pushing up prices for North Carolina consumers