U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview: Both the speed and scale of the COVID-19 outbreak are an unprecedented shock to the global economy. Although concerns had surfaced (Washington state declared a state of emergency on February 29th), much of the U.S. was operating normally just one month ago. Schools and restaurants were open, and no “stay at home” orders had been issued (most states issued statements limiting public gatherings and forcing closures around March 15th). This contrasts sharply with current conditions, with most non-essential business operations suspended.
Given the sudden onset, it is too early for many economic statistics to describe the magnitude of the shutdown’s effects. Major banks have released estimates for the potential change in U.S. GDP in the second quarter. Goldman Sachs suggested a 24% reduction. Morgan Stanley predicted a 30% decline. A senior official from the Federal Reserve suggested that it could be as bad as a 50% collapse. For context, the worst quarterly contraction during the financial crisis was 8.4%. With many businesses shutdown, the applicability of the numbers that eventually surface may be limited beyond the simple fact that they will describe the worst shock to the world economy in the modern era.
Acknowledging the seriousness of the situation, the U.S. government moved to mitigate the effects. The U.S. passed the largest ever fiscal stimulus package. Valued at roughly $2 trillion, this represents about 40% of quarterly U.S. economic activity (U.S. economy was over $21 trillion in the 2019 calendar year) and is more than double the package signed during the financial crisis in 2008. The goal of the support is to bridge business and consumer incomes through the period of the epidemic.
While the cash infusion from the stimulus will help, the flow of credit is critical. As is true in most recessions, the flow of funds through the financial sector will be needed to keep businesses and consumers operational. In difficult times, like recessions, banks can require accommodation to maintain their confidence that loans can be repaid. This is why the role of central banks is important. To promote lending, the Federal Reserve dropped interest rates to zero, matching the lowest level on record. In addition, the Federal Reserve is increasing the money supply by renewing its purchases of Treasury and mortgage-backed securities and created means to facilitate greater credit access to consumers, businesses, and municipalities.
The core of the crisis is epidemiological. The massive economic consequences are a symptom of a health emergency. As a result, the first step towards economic recovery is containment of the virus. Positive news on the disease front is that certain countries, notably China and some of developed East Asia, appear to have already been able to limit the spread to COVID-19. Also, even in virus-stricken Italy and Spain, there has been evidence that new case numbers are beginning to slow. With any luck, that progress will be maintained and will accelerate around the world, enabling progress towards economic normalization.
Employment: The U.S. economy is estimated to have had a net loss of 701,000 jobs in March (based on data collected early in the month). This put an end to the record 113 months of job increases registered between September 2010 and March 2020. The unemployment rate rose from its lowest rate since the late 1960s (3.5%) to its highest since the spring of 2017 (4.4%). The surveys used for both the job gains/losses and the unemployment rate were conducted in the first half of March and therefore missed the more drastic changes that occurred later in the month.
As was the case during the financial crisis, a labor market indicator that has gained more attention is the weekly change in jobless claims. This is because it is weekly, and therefore more timely. Layoffs are a part of normal business conditions, and readings below 300,000 per week are associated with a healthy labor market and overall job growth. Prior to the latest couple weeks, values had been below 300,000 since 2014. In the week-ending March 21st, initial claims were 3.3 million. In the week-ending March 28th, claims were 6.6 million. The highest value recorded in the wake of the financial crisis was 665,000. The volume of claims is straining the state offices that distribute funds and can be expected to be a weight on budgets for years to come.
Consumer Confidence & Spending: The Conference Board’s Index of Consumer Confidence fell from 132.6 to 120.0 from February to March. This was the largest monthly decrease since August 2011. However, the survey used to generate these figures went out early in March and missed the full effect of widespread business closures. Overall spending was up 0.1% month-over-month and up 3.0% year-over-year in February (latest available). Spending on clothing was down 1.0% month-over-month but was up 4.3% year-over-year.
Consumer Prices & Import Data: The CPI for garments was up 0.6% month-over-month in February, but was down 1.4% year-over-year. On February 14th, the U.S. lowered the level of supplemental tariffs applied to imports of Chinese apparel from 15 to 7.5 percentage points. Between September and February (tariffs initially applied September 1st), U.S. apparel imports from China were down 22% in terms of weight volume. Other countries were able to increase shipments, but that was not enough to match the decline from China, and there was a 7% net loss in apparel import weight. Apparel weight should translate nearly directly to fiber weight. These losses are meaningful, but likely will be dwarfed by the declines that will follow the coronavirus.