Executive Cotton Update
U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview: Job gains have decelerated in recent months. However, the U.S. economy has held up better than was generally feared when inflation was surging and interest rates started climbing sharply higher. The effects of interest rates on an economy are lagged, but it has been 18 months since rates started increasing (began in March 2022), and forecasts for US GDP have been getting revised higher. When starting the process of increasing interest rates, claims from the Federal Reserve which suggested a soft landing was possible were met with skepticism. However, projections are now that the U.S. may be able to avoid a recession in 2023 and into 2024.
A major reason the economy has been resilient is the labor market has not weakened. The unemployment rate remains below four percent, which has only been maintained during a few periods in U.S. history. Strong employment can support income and, therefore, consumer spending. The rate of wage increases has slowed, but with the collapse in inflation, wages have been increasing faster than consumer prices since May. Higher wage growth relative to inflation implies greater spending power and can support continued strength in spending.
Employment: The U.S. economy is estimated to have added +187,000 jobs in August. Revisions to figures for previous months lowered the estimate for June by -80,000 to +105,000 and dropped the estimate for July by -30,000 to +157,000. The current twelve-month average is +286,000. The reductions to existing estimates suggest a more significant slowdown in the labor market than previously reported.
The unemployment rate increased from 3.5% to 3.8%. This was driven by a large +736,000-person addition to the number of people included in the labor force (the unemployment rate is the ratio of employed people over the number wanting to work). The labor force participation rate (number of people wanting to work over the entire population) has recovered to the level before COVID (near 63%), but it remains lower than the rates near 67% that were common from 1990 to 2010. A reason for the longer-term decline is demographics, with the baby boom generation having reached retirement age.
Average hourly wage growth was at 4.3% year-over-year in August. Since March, wage growth has been between 4.3% and 4.4%. This remains well above the levels between the financial crisis and the pandemic, when wages commonly grew between two and three percent, but wage growth has shifted lower since the post-COVID-stimulus peak of 5.9% (March 2022).
Consumer Confidence & Spending: The Conference Board’s Index of Consumer Confidence decreased in August (from 114.0 in July to 106.1). The current value is near the average over the past twelve months.
In inflation-adjusted terms, overall consumer spending increased +0.6% month-over-month in July and was up +3.0% year-over-year. This was the highest rate of year-over-year growth in nearly one year and a half.
Spending on garments increased +1.3% month-over-month in July but was down -0.4% year-over-year. This marked the fifth consecutive month with a year-over-decrease in apparel spending. Despite the recent decreases in annual rates of clothing spending, the volume of apparel that consumers are buying continues at rates that are more than 20% higher than they were in 2019.
Consumer Prices & Import Data: Retail prices for apparel increased month-over-month for the ninth consecutive time in July (+0.2%). Year-over-year, average retail clothing prices rose for a twenty-eighth consecutive month (+4.5% in July). Relative to the average in 2019, clothing prices were 6.1% higher in July.
In seasonally-adjusted terms, the average import cost per square-meter equivalent (SME) of cotton-dominant apparel decreased -1.2% month-over-month. Although average costs have moved lower than the post-COVID peak (-9.7% relative to the value of $4.31/SME in November 2022), they remain elevated compared to where they were before the pandemic (averaged $3.45/SME in 2019, the value in July was 12.9% higher).
Import volumes shifted sharply lower in the second half of 2022 as import costs increased and concerns about the economy rose alongside interest rates. In terms of weight volume, recent apparel imports have been at some of the lowest levels in decades (excluding the months most affected by COVID). Those volumes have been moving slightly higher over the past three months but remain low. The low level of imports has contrasted with the relative stability of consumer spending on apparel.