U.S. Macroeconomic Indicators & the Cotton Supply Chain
July 2019
Macroeconomic Overview: Economic expectations and financial markets have been pushed and pulled by a rapidly evolving swirl of influences. Concern regarding a global slowdown built expectations that central banks and governments around the world will move to provide stimulus. Belief that stimulus is forthcoming has been a factor associated with the rise in stock market values that led to a series of new records for multiple U.S. stock indices.
A commonly cited cause of concern for the global economic environment is escalation in the U.S.-China trade dispute. Threats issued in early May included the possibility of the U.S. increasing tariffs on a set of goods covering all U.S. imports not yet affected by previous increases (valued at $250 billion). This would include more consumer goods than the lists of goods already facing higher duties (most goods already affected are inputs for manufacturing). As a result, there has been concern that the threatened tariff increases might lead to higher consumer prices and lower consumer demand. Demand-related fears have affected a range of commodity prices, such as oil, copper, and cotton.
Since the G-20 meeting in late June, however, the pendulum of expectations regarding the trade dispute has swung away from escalation and towards reconciliation. This has reversed some of the declines in commodity prices and provided support for stock markets. However, as an agreement has appeared more likely, confidence that central banks (notably the Federal Reserve) will provide stimulus has weakened.
The speed at which reversals in trade expectations have come and gone has been a source of volatility and uncertainty. For much of the winter and spring, it appeared that the U.S. and China were heading closer to an agreement before the sharp reversal in early May. The rapid back-and-forth has not been limited to U.S.-China relations either. On May 30th, the U.S. threatened to increase tariffs on the entirety of its imports from Mexico by as much as 25 percentage points by the end of the year. By June 7th, those tariff threats were indefinitely removed. This means that in about one week, a credible threat for tariffs on all U.S. imports of Mexican goods was announced and lifted.
Employment: The U.S. economy is estimated to have added 224,000 jobs in June. Revisions to previous month’s data were negative, with the figure for April falling from +224,000 to +216,000 and the figure for May falling from +75,000 to +72,000. Over the past twelve months, the average increase in the number of employed people has been 192,000 per month. During the same time period last year, the average rate of growth was 206,000 per month. The weaker job reading in May supported the belief that a slowdown in hiring would push the Federal Reserve to increase interest rates. Along with the shift in expectations regarding a U.S.-China trade agreement, the strong jobs number in June makes an impending decrease in interest rates appear less likely than just a few weeks ago.
The unemployment rate rose marginally, from 3.6% to 3.7%. With job growth, the reason the unemployment rate ticked higher was because of an increase in the number of people in the labor force. Average hourly wages increased 3.1% in June. This was nearly even with the value posted in May. Although the wage growth for the past two months was lower than the levels above 3.3% registered throughout the fall and winter, they remain among the highest values recorded since the financial crisis (wage growth did not climb above three percent until August 2018).
Consumer Confidence & Spending: The Conference Board’s Index of Consumer Confidence fell sharply in June, dropping 9.8 points from 131.3 to 121.5. Despite the decrease, readings over 100 are generally considered above average and values over 120 have been rare (the highest recorded value on record was 144.7, set in January 2000).
Overall consumer spending increased 0.3% month-over-month in seasonally-adjusted terms in May (latest month with data available). Year-over-year, overall apparel spending increased 2.7%. Consumer spending on apparel increased 0.6% month-over-month in seasonally-adjusted data for May. Year-over-year, apparel spending was 4.8% higher. Annual rates for spending on apparel have been strong in recent months (up 5.1% in March, up 6.3% in April). For comparison, the average annual rate of increase in 2018 was 3.6%. In 2017, the average was 2.7%.
Consumer Prices & Import Data: Retail apparel prices have fallen month-over-month for the past three months (-1.9% in March, -0.5% in April, and -0.1% in May) and were down 3.5% year-over year in May. Average import prices for cotton-dominant apparel were nearly unchanged in seasonally-adjusted data for May, rising $0.01/square meter equivalent (SME) to $3.49/SME.
It has been about a year since the first round of major tariff increases were put into place (U.S. and China implemented tariff increases on goods valued at $34 billion on July 7, 2018). Tariff increases have not applied to U.S. apparel and home textile imports from China yet, but threats that the U.S. would move to increase tariffs surfaced last summer (initial threats calmed last fall, threats were renewed in early May, and were lifted once again just a few weeks ago). Even though tariffs have not been enacted, uncertainty surrounding that possibility has been in place for nearly a year. Given the complexity of supply chains, it takes a while for results from decisions to surface in shipments.
In volume terms (SME), apparel imports of all fibers from China increased 1.2% in the first five months of the year. Over the same time period, U.S. apparel imports from all locations increased 4.3%. As a result, the data indicate that there has not been an exodus from sourcing from China, just that Chinese apparel shipments have been growing at a slower rate than those from the rest of the world. China’s share in the first five months of the year was 39.8%, down marginally from 41.1% last year.
