Macroeconomic Overview: Global financial markets are experiencing another round of volatility. The latest fluctuations have been attributed to discussions surrounding tariffs on trade between the U.S. and China. The current timeline of events is the following. The U.S. increased duties on steel and aluminum imports from China in late March. China responded in early April with increased tariffs on a range of U.S. products, including fruit, nuts, wine, pork, steel, and aluminum. Both parties have since generated larger lists of products that could face increased tariffs.
China included cotton fiber on its expanded list of U.S. products (valued at $50 billion) that could face an additional 25% duty. In its larger list of Chinese products that the U.S. initially released (valued at $50 billion), there were no apparel items. However, the U.S. has since indicated that it will look into an even greater set of products (worth another $100 billion) and the items in this longer list have yet to be released.
Uncertainty surrounds the back-and-forth on tariffs. However, if the larger lists are implemented, a possible consequence of is inflation. The retail apparel industry provides an example of a market in which prices could be expected to rise if clothing did eventually appear on an expanded list of U.S. imports facing tariffs and if those higher tariffs were eventually enforced. Over the past three decades, the U.S. retail apparel market has become dominated by imports. With initially low labor costs and with continual improvements in efficiency, China has come to dominate the U.S. apparel import market (China represented 42% of the square meter equivalence of total U.S. apparel imports in 2017). China's accession to the WTO in 2001 led to a decline in U.S. apparel sourcing costs that has essentially been maintained through to the present. Lower sourcing costs are a strong contributor to the declines in retail apparel prices over the past couple decades and are a reason why U.S. retail apparel prices are lower than they were in the 1990s. With such a large proportion of U.S. apparel imports coming from China, the prospect of raising tariffs on Chinese apparel imports suggests higher U.S. retail prices (at least in the short-term, until other sourcing options are found). If such a scenario were replicated across other sectors of the economy (e.g., electronics, cars, and other manufactured goods), general inflation would occur.
Prior to any of the recent discussion involving tariffs, the Federal Reserve was already concerned about inflation and that is why the central bank has been expected to increase interest rates three or four times this year. Relative to inflation, a focus of the Federal Reserve has been the labor market and accelerating wage growth. However, the emergence of additional inflationary pressure, which could possibly originate from tariffs, may result in further increases in interest rates. Higher interest rates can decelerate economic growth, and overly aggressive increases in interest rates are commonly cited as a possible cause for the next recession.
Employment: The U.S. economy was estimated to have added 103,000 jobs in March. Revisions lowered the previous figure for January (from +239,000 to +176,000) and lifted the figure for February (from +313,000 to +326,000). The current value for March is significantly lower than the number for February. Nonetheless, the average for the first three months of the year is higher than it was last year (+202,000 in 2018, +177,000 in 2017). The unemployment rate was unchanged for the sixth consecutive month, holding at 4.1%, which is the lowest level since 2000. Year-over-year, wages were 2.7% higher.
Consumer Confidence & Spending: The Conference Board's Index of Consumer Confidence decreased 2.3 points in March (from 130.0 to 127.7). February's value was the highest since 2000 (when they reached record levels). As a result, even with the decline last month, values remain high relative to where they have been historically.
Growth in consumer spending has been sluggish. Month-over-month, overall spending was down 0.1% and spending on apparel was down 1.4% in January (latest month with data available). Year-over-year, overall spending was 2.7% higher and apparel spending was 3.5% higher.
With confidence high, wages rising, and taxes falling, several possible reasons have been suggested for the slowdown in spending in recent months. One is that the acceleration in spending in late in 2017, which was boosted by hurricane-related purchases of replacement items (major storms hit both Texas and Florida this fall), was not sustainable, and that recent data are simply showing a return to a more normal set of spending conditions. Another potential reason is that loans have become less widely available. The Federal Reserve conducts a survey of loan officers, and recent results indicate that the trend toward looser lending standards began to flatten out in late 2017. Tighter lending standards can constrain credit card spending, and therefore can also influence spending growth.
Consumer Prices & Import Data: Retail apparel prices increased 0.6% month-over-month and 1.5% year-over-year in the latest available data (February). Average import prices (seasonally-adjusted) for cotton-dominant apparel were slightly higher (+0.2%) month-over-month in February and were 0.9% higher year-over-year.