Macroeconomic Overview: The U.S. dollar has fallen 4% against a broad collection of widely circulated currencies since January. While the magnitude of the decline may not appear large, it does signal an important reversal relative to recent years. Against the same broad collection of currencies, the U.S. dollar had consistently strengthened since 2013, rising more than 25% over the past four years before turning lower in recent months.
One factor that can affect exchange rates is relative interest rates. When interest rates are higher in one country, money can be expected to flow out of countries with lower interest rates and into the one with higher rates as investors seek greater returns. The corresponding increase in demand for the currency with higher interest rates can drive up that currency's value, while the decrease in demand for the currencies of countries with lower rates can pull those currencies' value lower.
Recent announcements from central banks around the world have affected interest rates. After three increases since December, the Federal Reserve hints that it plans to continue to increase interest rates and that it will likely begin reducing its holding of Treasury notes, which would decrease the supply of dollars. In isolation, these events would support a stronger dollar. However, other central banks have also indicated they might increase rates (e.g., United Kingdom, Canada). Officials from the European Central Bank have stated that they may be preparing to slow or stop further increases in the supply of the euro.
Another factor that can affect exchange rates are expectations relative to economic growth. In recent years, economic growth in the U.S. has been more robust than it has been in many other developed economies, and demand for the dollar may have been supported by greater confidence in the U.S. economic outlook. That situation is evolving. With consumer spending sluggish, U.S. GDP growth can be expected to remain weak. Meanwhile, forecasts for Europe and emerging market economies have been becoming more optimistic.
In the globalized economy, exchange rates have a range of effects. For trade conducted in U.S. dollars, a stronger dollar is often associated with lower price levels. The strengthening of the dollar in recent years has been a factor helping to pull costs of imported apparel lower. That influence may unwind if the dollar continues to lose ground. All else being equal, the same general relationship holds for commodities, with a weaker dollar associated with higher commodity prices. However, in many commodity markets, oversupply has outweighed currency-related influences. Both cotton (NY Nearby) and oil (Brent futures) have declined about 10% since January.
Employment: The U.S. economy is estimated to have added 222,000 jobs in June. Revisions to earlier months' data indicated that nearly 50,000 more positions were created in the past two months than were previously estimated (+33,000 for April from +174,000 to +207,000, +14,000 for May from +138,000 to 152,000). The unemployment rate was marginally higher last month, increasing from 4.3% to 4.4% due to growth in the labor force. Average hourly wages increased at a 2.5% rate year-over-year, which is near the average since 2015.
Consumer Confidence & Spending: The Conference Board's Index of Consumer Confidence rose 1.3 points to 118.9 in June. Last month's increase followed two consecutive decreases. Despite some of the downward movement recently, consumer optimism ranks among the highest on record. In the 50 years that the Conference Board has been publishing these data (began in 1967), recent levels are only behind those from the late 1960s and the early 2000s (before the dot-com bust).
Given the high level of consumer confidence, strong growth in consumer spending could be expected. However, consumer spending has been restrained in recent months. Overall consumer spending increased slightly in May (+0.1% month-over-month in inflation adjusted data). Between January and April, overall spending decreased twice month-over-month. Year-over-year, total spending was 2.7% higher in May. The strongest growth in spending since the recession occurred in late 2014 and early in 2015, when year-over- year rates averaged 3.5% (the Index of Consumer Confidence was near 100 during this time).
Consumer spending on garments has been more sluggish than overall spending. The average rate of year-over-year growth in apparel spending thus far into 2017 is only 0.1% (is 2.9% for overall spending). In May, clothing spending increased 0.8% month-over-month was up 1.7% year-over-year.
Consumer Prices & Import Data: Retail apparel prices decreased month-over-month in May, falling 0.9%. Year-over-year, retail apparel prices were 1.2% lower. After being virtually unchanged in the first four months of the year, seasonally-adjusted prices per square meter (SME) of cotton-dominant apparel imports edged slightly higher in May (+$0.03/SME). Nonetheless, average sourcing costs remain near the lowest levels recorded outside of the 2008/09 recession.