U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview: Concerns about economic growth remain. The commonly tracked producer manager indices (PMIs) released by the Institute for Supply Management (ISM) were lower in September. The manufacturing PMI, which can be a leading indicator for the overall economy, signaled contraction for the second consecutive month and posted its lowest value since 2009. The ISM PMI representing the service sector, which covers a much larger portion of the U.S. economy, also decreased last month and posted its lowest value since November 2018.
Due to concerns about growth, the Federal Reserve lowered interest rates in September. This followed a rate cut in August. These two 2019 reductions represent a sharp reversal relative to 2018, when there were four increases. The primary cause cited by the Federal Reserve for the cuts in interest rates was the slowdown in economic activity outside the U.S.
With the slowdown global, the U.S. central bank is not alone in taking action to stimulate growth. The European Central Bank (ECB) dropped its deposit rate to a record low (-0.5%) last month and will restart bond purchases to increase monetary supply further. China has made a series of reductions to bank reserve requirements and lowered interest rates. India’s government announced a major corporate tax cut in September.
With the deadline for Brexit approaching, Europe is facing significant policy uncertainty on top of weaker growth and may be the location facing the highest risk for a recession in the near-term. The strength of the U.S. labor market, and its ability to continually add jobs, suggests the U.S. faces less immediate risk. A risk for both the U.S. and Europe, however, is that interest rates are falling from already low levels and that central banks may be limited in its ability to provide further stimulus should conditions worsen.
Employment: The U.S. added 136,000 jobs in September. Revisions to figures for previous months lifted the estimate for July from +159,000 to +166,000 and lifted the figure for August from +130,000 to +166,000. Following the revisions, job growth has averaged +219,000 over the past twelve months. Over the same period last year, job growth averaged +179,000.
The rate of growth in average wages slowed last month. The current estimate indicates that wage growth was 2.9% in September. This was the first time in a year that wages improved by less than three percent (year-over-year increases in wages were commonly between 3.2-3.4% over the past twelve months).
The unemployment rate fell from 3.7% to 3.5% month-over-month in September. The unemployment rate is derived from a separate survey than the one used for job growth (unemployment rate from a survey of people, job growth from a survey of companies). The survey used for the unemployment rate identified a larger increase in employment in September than the survey of companies. That increase, along with a reduction in the number of unemployed, pushed the unemployment rate lower despite an increase in the number of people in the labor force.
Consumer Confidence & Spending: The Conference Board’s Index of Consumer Confidence fell 9.1 points last month, from 134.2 to 125.1. One year ago, the value was 135.3. Despite the lower value, the current reading remains among the highest ever recorded. If maintained over the next few months, consumer optimism can be expected to support consumer spending during the important holiday sales period.
Overall consumer spending increased 0.1% month-over-month in August (seasonally-adjusted). This was the weakest monthly growth since February. However, there has been strong growth since then, including the 0.8% monthly increase in March. The annual rate of growth in August was 2.3%, which is near the long-term average.
Apparel spending decreased 0.5% month-over-month in August. This was also the lowest reading since February. As with overall spending, there has been stronger growth in the spring and summer. In March, the month-over-month increase was 3.7%. Year-over-year, apparel spending was up 1.1% in August. The weak level of annual growth can be partially explained by the challenging comparison against August 2018. In August 2018, apparel spending was up 6.6% year-over-year.
Consumer Prices & Import Data: The CPI for garments was nearly unchanged month-over-month in August (-0.04%). Year-over-year, consumer apparel prices were 1.0% higher. Average import prices per square meter (SME) of cotton-dominant apparel were marginally lower month-over-month (-0.3%, from $3.47/SME to $3.46/SME). Year-over-year, average sourcing costs for cotton-dominant apparel were up 3.0%.
Despite U.S. threats to increase tariffs on Chinese apparel having been made more than one year ago, there has not been a decrease in China’s share of U.S. apparel imports. China’s share of overall apparel imports was 1.3 percentage points higher year-over-year in August (from 40.5% to 41.8%). The first batch of tariff increases on Chinese-made apparel went into effect in September, and the remainder of Chinese-made apparel imports will face increases in December. Analysis of patterns in pricing data suggests it could take seven to twelve months for any effects of these tariff increases to show up in trade data.