Manufacturers Watch Dollar

THE recent upward march of the United States dollar is far from welcome news for those American manufacturing companies heavily dependent on exports. A higher dollar can make US products more expensive abroad and thence less competitive. The dollar's rise ``doesn't kill off'' manufacturing stocks, says Jonathan Raclin, senior vice-president of the Chicago Corporation, an investment house based in that city. But it ``certainly takes a little cream off their earnings.''

Although US manufacturers selling abroad may not be immediately disadvantaged by the dollar's rise - since many contracts extend over a period of time, it ``cuts into the ability of US firms to do the business abroad that they would otherwise like to do,'' Mr. Raclin says.

The recent turmoil in China, as well as political unrest in parts of the Soviet Union, will only add to the volume of capital inflows into the US, Raclin says. This makes the monetary balancing act of the Federal Reserve System all the more difficult. On the one hand, Raclin says, the Fed can't allow the dollar to climb too high, thus working against US exports and a reduction in the trade deficit. On the other hand, if the dollar goes down too sharply, then there is ``trouble selling US paper [Treasury issues] abroad.'' This foreign money helps finance the federal budget deficit.

The main play in the market in recent weeks has involved merger-related issues, irrespective of their particular market sector. Stocks of major manufacturing companies have not come under strong selling pressure, experts note. Moreover, some export-linked manufacturing sectors have done very well, despite the strength of the dollar. Case in point: machinery companies.

The average machinery company obtains 34 percent of its revenues from international markets, according to Andrew Silver of Dillon, Read & Co. But profits are mainly concentrated in the US market, Mr. Silver notes. Moreover, many US machinery companies are low-cost producers in terms of the world machinery market. The upshot, as Dillon, Read sees it, is that the dollar would have to rise to the 180- to 200-yen level (from the current 142-yen range) before the US companies' competitiveness were substantially injured. Dillon, Read remains upbeat about the machinery group.

Even if US manufacturers are disadvantaged for the time being because of the higher dollar, ``what's a couple of months,'' asks Dennis Jarrett, a market strategist with Kidder, Peabody & Co., with a laugh.

``We're assuming that the dollar will pull back down in the period ahead,'' says Mr. Jarrett. ``If the Fed's primary focus is on fighting inflation, which seems to clearly be the case, then as inflation eases and the rates back down, the dollar will start to drop as well.''

Jarrett notes the recent drop in the federal funds rate, which eased to the 9.50 range last week, as suggesting that the Fed had decided to move to a slightly easier stance on interest rates.

Jarrett sees the continuing revival of the manufacturing sector as one of the underlying long-term trends within the US economy. Kidder, Peabody, he says, believes that the manufacturing sector ``will grow at a 6 percent annual rate for the next three to four years, compared with only 2.5 percent annual growth in real gross national product.''

Moreover, he says, the valuation of the industrial sector relative to the consumer sector is at a historic low, which suggests the need for a repositioning of interest in manufacturing stocks in general. Kidder, Peabody is currently recommending such heavy-industry stocks as Armco Steel and Illinois Tool Works.

Still, some market analysts continue to urge caution regarding US producers with strong overseas sectors. Marshall Acuff, portfolio strategist at Smith Barney, Harris Upham & Co., believes that the strengthening of the dollar could have a detrimental effect on the earnings of US multinational firms. His solution: Investors should focus on domestic-oriented companies. These ``made-in-the-USA'' companies, he says, should have no more than 5 percent of their earnings from overseas; would have no foreign manufacturing; would lack significant ``currency exposure''; and have no involvement in exports. That is not to say, he argues, that investors should avoid all multinationals, but only those that will find it difficult to offset the new strength of the dollar.

Among stocks recommended by Smith Barney are Automatic Data Processing, which provides transaction services to businesses, and Browning-Ferris Industries, a solid-waste management firm.