Strong Dollar To Weigh On External Sector Rebound

The chart below shows the 4-quarter rolling average of Net Exports' contribution to US GDP, vs the change in the real broad dollar index (inverted, in red).

• The large negative contribution in the last 2 years is basically one-off pandemic-related as goods imports soared during lockdown amid extremely strong domestic demand (and subdued foreign demand). In this case, unusually, the weaker dollar came hand-in-hand with a bigger drag from exports.
• While the historically large drags from net exports won't persist, likewise, we would expect continued USD strength to maintain pressure on the external sector.
• The broad real index is up about 7% Y/Y to May, implying a modest but growing drag ahead. NY Fed's trade model, for one, implies that for a 10% dollar appreciation shock at the beginning of year 1, net exports drag down GDP by 0.5pp in year 1 and 0.7pp in year 2 (versus baseline, and assuming the appreciation persists).
• Consensus sees real export growth easily exceeding import growth over the next several quarters - any disappointment on that front could weigh on net exports and overall GDP expectations.

Source: BEA, Fed, MNI Calculations