I enjoyed Neil Irwin’s recent piece of the dynamics between the strong dollar and cheap gas in the US macroeconomy. The issues Neil raises pose both an interesting question and a worrisome caveat.

Neil writes that “The giant question for the economy in 2015 was which of these forces [strong $ vs. cheap gas] would prove more powerful. The bad news is that so far, the strong dollar is winning.”

The reason that’s bad news is that the strong dollar makes our exports less competitive abroad* whereas lower gas prices, which work like a tax cut increasing disposable income, do not seem to have boosted consumer spending much. When you live in a 70% consumer spending economy, as we do (in Europe, it’s 55%; in China, about 35%), that means less growth/jobs than you might have expected just based on the decline in prices at the pump.

The implication is that people are saving their gas-price dividend instead of spending it, as this interesting graph from GS researchers suggests:

Consistent with the figure, Irwin points out that households savings rates are up and recent retail sales reports have underwhelmed.

But why? The fact that paychecks have been stagnant, at least before gas prices crashed, thereby lowering inflation and raising real pay, would lead one to believe there’s some untapped demand out there. Why isn’t the gas dividend leading consumers to tap it?

So, a few theories, followed by my assessment of them:

–People view the gas price increase as temporary, and thus expect it to fade away soon so they’re not changing their consumption patterns.

[Meh. I get Uncle Milty’s permanent income hypothesis—only changes perceived to be permanent alter the path of consumer spending—but a) the decline in gas prices has not been a blip but is at least a medium term phenomenon, and b) the untapped demand point above: real middle class incomes have been stagnant for a while and still remain well below their pre-recession levels.]

–There’s still enough insecurity among enough people about jobs and incomes that saving the gas dividend makes sense as an insurance policy.

[I’d give this one some weight.]

–For those in affected industries (tradable goods), the stronger dollar is contributing to the above point re insecurity.

[Also plausible. Manufacturing production and employment has been hit by the strengthening dollar, as have been capital goods spending (manufacturing jobs have been at a standstill so far this year). Including data released this morning, core capital goods orders (nondefense, excluding aircraft) fell half-a-percent in March and have fallen every month since August 2014. According to Moody’s.com, core goods, which are a decent proxy for business investment, are now 4.6% below 2014 levels.]

–-Nothing to see here folks, just data noise.

[Always a possibility, but I found the GS graph convincing and consistent with the other data points noted above.]

As the job market tightens and if gas prices stay low, this extra savings could—I’d guess would—unwind. That would be good for growth and jobs but that brings me to the other concern I’ve got here.

The strong dollar slows growth by increasing the trade deficit, typically with a lag. While still a significant drag, the trade imbalance has been relatively low lately, at around -3% of GDP (it was -4% in early 2012). But another way to view the trade deficit is the difference between aggregate savings and investment. If savings were to fall as consumer spending rises, especially with weak economies (and weak currencies) of some of our trading partners, there is a good chance that the trade deficit will expand as we suck in more relatively cheap imports compared to our exports, which are costlier to foreign buyers due to the strong dollar.

China is a major player in this scenario. For reasons having to do with the current policy push there toward more internal investment and consumption, their currency does not appear to be misaligned (artificially low) relative to the dollar, but if they should decide that their slowing growth rates are unacceptably low, they will devalue and that will hurt us.

In other words, there are real growth risks associated with the strong dollar, some of which are already in play, causing headwinds (e.g., core capital goods, manufacturing employment). Lower gas prices could help offset that problem, but if consumers do ratchet up their spending, a lot of it could leak out of the country, generating more labor demand abroad versus here.

One other point and then I swear I’ll stop! Raising rates at the Fed exacerbates this problem by both raising the cost of domestic investment and the value of the dollar. Just sayin’…

*Unfortunately, our trade negotiators don’t like to think about that problem—they refuse to put currency disciplines into the TPP, a stance to which I very much object. To be clear, the current strength of the dollar is not driven by currency manipulation but by relative growth rates and the relative monetary policies of central banks. But it’s a timely reminder of the impact of the strong dollar on US growth.