The bet is on manufacturing trade to offset the housing market decline

The lowering of interest rates in the United States has been devastating for the dollar. In September, the dollar declined 6 points, or over 3.5%, against the euro. What happened to the “strong” dollar policy that has been often espoused by US government officials?

Clearly, the benefit of a strong dollar has been discarded. The Fed's implicit bet is that lowering interest rates to save the housing market is worth the potential decline in the dollar. Most middle-class investors hold more wealth in the housing market than in offshore investments. Wall Street may be better able to hedge currency risk than credit or economic risk.

Foreign investors do not vote, and the dollar's decline may help the US export business. If workers can move from the construction site to the manufacturing site, the economy may not be plunged into a recession. While there is a delayed reaction in trade numbers from a currency decline, the trade balance is starting to see some improvement.

The real problem is whether the government will allow markets to work and grow exports without “a little help”. There has been a growing drumbeat in Congress to help the manufacturing sector through protectionist trade-related bills. The argument is that the manufacturing sector has been hurt by unfair trade practices, manipulated currencies, and trade barriers. Unfortunately, these types of bills usually lead to retaliation on the part of trading partners. The net results will often be less trade, which may not be what we want for our labor markets.

A more careful look at the US manufacturing sector may suggest that it has not been in as bad of shape as politicians have stated. There have been large reductions in the labor force associated with export manufacturing, but the size of exports and export growth have been strong. Much of the labor decline has come because of competitive pressures, which have increased productivity.

The value-added in manufacturing is at all-time highs. The level of output, revenues, operating profits, return on equity, and the value of exports are all at all-time highs in the manufacturing sector. The US still accounts for over one-fifth of world manufacturing added. In fact, Daniel Ikenson in "Thriving in a Global Economy: The Truth about US Manufacturing and Trade", a paper from the Center for Trade Policy Studies at the Cato Institute, argues that US manufacturing is very healthy. Perhaps the best policy right now would be to let manufacturing grow with the lower dollar instead of trying to save this sector with new trade laws.