Macroeconomic Overview: A question that has been looming over the U.S. economy for the past several years has been when the Federal Reserve might increase interest rates. The more that the U.S. economy improves, the more likely there will be rate increases. The recent acceleration in job growth, along with some improvement in the housing sector, suggested that an increase might be coming sooner than previously predicted. This month's employment data signaled some slowing in job growth relative to values posted earlier in the summer and may push a rate increase that was expected in September back to December.
A rise in interest rates can have several effects on apparel sourcing costs. Most of these effects stem from the relationship between interest rates and the dollar. Even though interest rates in the U.S. would remain very low by historic standards with an incremental increase, a move towards higher rates in the U.S. would be opposite in direction relative to recent actions taken by many other countries. Correspondingly, the dollar could be expected to increase in value relative to other currencies. For U.S. retailers and brands who source textiles and apparel abroad, this can help lower sourcing costs. This is because a stronger dollar is associated with lower commodity prices like cotton. In addition, a stronger dollar diminishes the relative price of cost factors purchased in other countries. For example, if a worker is paid in Chinese RMB and the RMB declines relative to the USD, it takes fewer USD to pay that employee. Both the decline in cotton prices and the increase in the strength of the dollar were factors that enabled average import prices for apparel to fall to their lowest levels since 2010.
Employment: The U.S. economy was estimated to have added 151,000 jobs in August. The latest figure represented a deceleration relative to the increases posted in June and July. Revisions to June (-21,000, from +271,000 to +292,000) and July (-20,000, from +255,000 to +275,000) were nearly offsetting. On average, payrolls expanded by 182,000 per month thus far into 2016 (January- August). Over the same time period last year, job growth averaged 219,000.
The unemployment rate was unchanged at 4.9% for the third consecutive month in August. There was another slight increase in the size of the labor force last month, which allowed the unemployment rate to hold steady despite job gains. Estimates indicate that there were 2.2 million more people wanting to work in August than there were a year ago. Growth in the labor force implies a greater potential for future economic activity and therefore is positive for the long-term health of the economy.
Higher wages are a likely cause for more people wanting to work. In August, average earnings rose 2.4% year-over-year and wage growth has been 2.3% or higher for the past 13 months. This pace of increase is not large by historic standards, but inflation is low by historic standards and wages have been increasing 1.5 to 2.0 percentage points above overall inflation. The separation between wages and inflation is wider than it was before the recession, implying a stronger rate of growth in disposable income, which should support continued growth in spending.
Consumer Confidence & Spending: The Conference Board's Index of Consumer Confidence rose in August (+4.4 points to 101.1). The latest value is the highest since September of last year. At a level over 100, the current reading ranks among the highest since the financial crisis. Since 2014, the index has generally held to figures between values of 90 and 100. The labor market has likely been the strongest supporter of consumer attitudes recently, although the recent decrease in gasoline prices could also be a factor. Regardless, consumer optimism has improved throughout the summer, despite uncertainty posed by the upcoming election.
As could be expected given the improvement in consumer confidence and the labor market, growth in consumer spending has been strong. In the latest available data, overall spending increased 0.3% month-over-month in July. Year-over-year, overall spending was up 3.0%. A year ago, the annual rate of increase was 3.4%. Given that spending growth above three percent can be considered healthy, the gain this July can be considered solid because it was produced against strong rate of growth posted a year ago.
Consideration of growth last year is even more important when looking at apparel spending. One year ago, spending on apparel was up 5.3% year-over-year. In July of this year, annual growth was only 0.6% higher. Some of that weakness in annual growth is due to the strength of last year's number. However, some of the weakness is also a result of some slowing in consumer apparel spending in July. In July, consumers spent 0.1% less than they did in June. There has been considerable optimism regarding the outlook for back-to-school spending and the release of spending data for August should reveal whether the expected increases in clothing spending will be realized or not.
Consumer Prices & Import Data: Average retail prices for apparel were nearly unchanged in the latest data (+0.1% month-overmonth in July). Year-over-year, consumer garment prices were also marginally higher (+0.7%). In seasonally-adjusted data for July, average sourcing costs for cotton-dominant apparel declined by the most (-2.8%) month-over-month since the immediate aftermath of the spike. Year-over-year, values were 5.3% lower and were the lowest level since 2010.