Macroeconomic Overview: A series of data points indicate that the U.S. economy is in good health. Readings from purchasing manager indices highlight expansion in both the manufacturing and service sectors. Consumer confidence is at its highest in 15 years. Job growth remains solid. More people are working and wanting to work. Wages are ticking up. The stock market continues to set new records.
At its meeting in early December, the Federal Reserve indicated that it would increase interest rates. This announcement was widely expected, and it has been associated with strengthening of the dollar. In terms of the Federal Reserve's trade-weighted index, the value of the dollar is nearly 30% stronger than it was in the summer of 2014. Gains made over the past year and half have lifted the dollar to its highest level since the early 2000s. For U.S. apparel retailers, a stronger dollar can help lower sourcing costs. For U.S. manufacturers, a stronger dollar can make the price of exports more expensive.
Employment: The U.S. economy was estimated to have added 156,000 jobs in December. Revisions to figures for the past two months lifted existing estimates by a net total of 19,000 positions. The October figure declined 7,000 (from +142,000 to +135,000) while the figure for November increased 26,000 (from +178,000 to +204,000). On average, payrolls are estimated to have expanded by 180,000 jobs per month in 2016. In 2015, job growth averaged 229,000. In 2014, the average was 251,000.
However, in 2014, the unemployment rate averaged 6.2%. In 2016, the unemployment rate averaged 4.9%. With more people working, it becomes increasingly expensive and therefore increasingly difficult to maintain higher rates of job growth. In December, the unemployment rate nudged slightly higher, from 4.6% to 4.7%, but remains near the lowest values posted since the recession. November's value was the lowest since the financial crisis nearly ten years ago. Given the expansion in payrolls last month, the reason for the slight increase in the unemployment rate in December was an increase in the number of people wanting to work.
Higher wages should be enticing more people to work. Average hourly earnings have been rising by 2.0% or more year-over-year for every month since March 2015. In December, the rate climbed to 2.8%, which is the strongest rate of year-over-year growth since 2009. Relative to historical data, wage gains of 2.0% are not particularly strong. However, inflation rates have been exceptionally low. Wage growth has outpaced increases in aggregate prices by more than a percentage point since early 2015, and this is a wide margin by historic standards.
Consumer Confidence & Spending: Stronger growth in wages relative to inflation suggest consumers are enjoying greater spending power. In turn, this could be feeding into more positive consumer attitudes regarding their financial situation. In December, the Conference Board's Index of Consumer Confidence increased 4.3 points to a reading of 113.7. This value is the highest since 2001 (although the index did hold to levels as high as 111 in early 2007). Higher consumer confidence, in conjunction with additional consumer disposable income, could be expected to support consumer spending.
Early reports regarding the important holiday season have been mixed, with strong sales on-line and weak sales in brick-and-mortar stores. Amazon, which analysts estimate to represent nearly half of all U.S. on-line sales, does not reveal all of its sales figures. Nonetheless, the company did indicate that it delivered more than one billion items during the holiday season and called 2016 its best year for holiday sales. UPS and FedEx both reported shipment volumes that easily surpassed those from a year ago, with respective year-over-year increases of 14% and 10%. The strength of on-line spending contrasts with reports from traditional retailers. Several department and mall-based stores indicated the 2016 holiday was challenging, with choppy sales, promotions, and decreased sale volumes relative to a year ago. A few major department and mall-based stores recently announced store closures and layoffs.
In November, the latest month with government data, overall spending was reported to have been up 0.1% month-over-month and up 2.8% year-over-year. Apparel spending rose 0.5% month-over-month in September but was up only 1.1% year-over-year. Since late-2015, year-over-year increases in apparel spending have been significantly smaller (generally between 0% and 2%) than they were between 2014 and the first half of 2015 (when year-over-year growth was between 4% and 6%).
Consumer Prices & Import Data: Average retail prices for apparel declined in November (-0.6%). Year-over-year, consumer garment prices were marginally higher (+0.2%). In seasonally-adjusted terms, the average import price per square meter equivalent (SME) of cotton-dominant apparel decreased 3.2% month-over-month in November. The current sourcing cost of $3.11/SME is virtually even with values registered before the price spike. Year-over-year, average import prices were 6.6% lower than they were a year ago. Relative to the post-spike peak marked in September 2011, average import prices were 17.8% lower.