Macroeconomic Overview: Over the next several weeks there will be a series of events that are important for both the U.S. and global economies. Relative to the U.S., a significant event will be the meeting of the Federal Reserve Open Market Committee in the middle of March. Late in 2016, the Federal Reserve indicated that a series of increases in interest rates were possible in 2017. Given the strength of recent economic data, it is widely expected that the Federal Reserve will announce the first of these increases later this month.
In Europe, there is an election in the Netherlands on March 15th. One of the leading candidates is pushing for an exit from the European Union. Likewise, France also has a leading candidate pushing for a separation from the European Union in an election to be held in late April. Another source of uncertainty for Europe in the near-term is the issue of Brexit. The prime minister of Great Britain has stated that her country will begin the process of separating from the European Union by the end of March.
The outcome of each of these events can be expected to have longer-term influences on trajectories of economic growth and immediate impacts on exchange rates. While inhibiting inflation, higher interest rates can slow GDP growth and are often associated with strengthening currencies. Any vote for removal from the E.U., or the announcement of a speedy process for the removal of Britain from the E.U., could be expected to result in further declines in the value of the euro and the British pound. Volatility in exchange rates can translate into volatility in commodity prices. Oil prices, which continue to face a situation of oversupply, fell nearly 10% in early March.
Employment: The U.S. economy was estimated to have added 235,000 jobs in February. This was the second monthly increase over 200,000 and was well-above the average level for 2016 (+187,000). Revisions to previous estimates for December (-2,000, from +157,000 to +155,000) and January (+11,000, from +227,000 and +238,000) indicated job gains were slightly higher (+9,000 in combination) over the past two months than previously estimated.
The unemployment rate decreased marginally in February, reversing the 0.1 point increase in January in dropping from 4.8% to 4.7%. Year-over-year, the unemployment rate was 0.2 points lower. In addition to job gains, a factor helping the unemployment rate is a low level of layoffs. The four-week average for initial claims for unemployment insurance is approaching all-time lows (data back to 1967).
A factor that has prevented the unemployment rate from falling even lower is the increase in the size of the labor force. Relative to one year ago, nearly 1.7 million more people are wanting to work now. The labor force participation rate (number of people wanting to work relative to the population of the U.S.) has been stable to slightly higher since reaching a low near 62.5% in the summer of 2015. Rising wages may be encouraging more people to work. In February, the year-over-year increase in average hourly wages for private sector employees was 2.8%, representing the second strongest rate of growth since the recession.
Consumer Confidence & Spending: The Conference Board's Index of Consumer Confidence increased 3.2 points in February. The current reading of 114.8 is not only the highest value since the recession, it is also the highest value since 2001. Driving this month's increase were improvements in perceptions regarding business conditions and the labor market.
Despite the recent strength in consumer confidence and the uptick in wage growth, consumer spending contracted slightly in inflationadjusted terms in January. Overall spending decreased 0.3% month-over-month but was up 2.8% year-over-year. Spending on clothing fell 0.8% month-over-month and down 0.3% year-over-year.
Consumer Prices & Import Data: After decreasing in December (-0.4% month-over-month), retail apparel prices rose in January (+1.0%). The CPI for garments in January was about 1.0% higher than a year ago.
In seasonally-adjusted terms, the average cost per square meter of cotton-dominant apparel imports was marginally higher monthover-month in January. Nonetheless, sourcing costs have been trending lower since the middle of 2015 and the most recent values are near the lowest levels posted since 2010. With cotton fiber prices higher year-over-year, the stronger dollar and lower order volumes may have enabled the decreases in import prices over the past year and a half.
Despite decreases in sourcing costs, the volume of cotton-dominant apparel imports declined in 2016 relative to 2015 (-3.9% in terms of SMEs). Shipments from China were 5.5% lower. There were important increases from other shippers, including Vietnam (+1.8%), Bangladesh (+1.2%), and India (+1.3%). Collectively, these exporters represent the same share of SMEs of cotton-dominant apparel as China (30%), but the declines in arrivals from China as well as most other countries outweighed the gains from these three locations and pulled the global figure for cotton-dominant apparel imports lower. SME volume for apparel imports of all-fibers were also lower in 2016 (-1.1%). At the country level, the most significant changes included declines from China (-1.9%), Honduras (-3.0%), and Cambodia (-14.1%) as well as an increase in shipments from Vietnam (+6.9%).