U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview: Following a meeting in late September, the Federal Reserve increased interest rates for the third time this year. The official statement from the central bank indicated that they have confidence that economic expansion will continue and suggested that interest rates will likely increase again in December. This official statement is updated after each meeting, and a notable revision in September was that a comment stating that monetary (interest rate) policy remained accommodative (stimulative) was removed.
A shift away from stimulative interest rates may eventually be a factor leading to slower economic growth (by making borrowing more expensive, spending can slow). Nonetheless, the process can be expected to be gradual. Despite the series of increases this year, the Federal Funds interest rate that the Federal Reserve controls remains near two percent. Apart from the extremely low rates maintained since the financial crisis and the stimulative rates put into place after the 2001 recession, the current Federal Funds rate still ranks as the lowest in the modern era (post-1965).
Rising interest rates are associated with strengthening currencies. Since April, when the Federal Reserve suggested it would be more aggressive in increasing interest rates, an index comparing the dollar against a wide range of other currencies (Federal Reserve Broad Trade Weighted Index) has risen more than seven percent. Against the Chinese RMB, the dollar gained 8.5% over the same time period. The rise in the dollar relative to the RMB will partially offset the effect of tariff increases imposed against Chinese exports.
On September 24th, the U.S. imposed another set of tariff increases on a collection of goods from China worth $200 billion. With a few exceptions, this included HS Chapters 50-60 (HS Chapters are internationally accepted broad classifications of goods), which cover a wide range of fiber, yarn, and fabric. Goods on the list faced tariff increases of 10 percentage points (ppt). However, in January, the size of the increase could rise to 25 ppt. For example, if a product from China had a 5% tariff rate previously, it was assigned a 15% tariff rate on September 24th. In January, tariff rates is set to increase 30% (25 ppt increase from original 5%).
Absent from the $200 billion set of goods were HS Chapters 61-63, which cover finished apparel and home textiles. However, the U.S. administration promised that if China implemented tariff increases in response to the $200 billion list, then the U.S. would initiate another round of tariff increases on a set of goods collectively valued at $267 billion. In combination with previous increases, this would imply that virtually all U.S. imports from China will have been subjected to tariff increases. China did respond in late September, lifting duties on imports from the U.S. valued at $60 billion. In combination with previous increases, this means that China has already applied increases in tariffs to virtually all of its imports from the U.S.
Given that the $267 billion set would cover most goods that have not yet faced tariff increases, this next round should include HS Chapters 61-63. This means that finished apparel and home textile imports from China would be covered whenever this next set might be implemented. Both the potential percentage point change in tariffs and the timeframe for implementation are currently unknown. Over the past twelve months, China represented 42% of the square meter equivalence (SME) of U.S. apparel imports and 54% of non-apparel textile SME. Supply chains will adapt, but with China representing such large proportions of U.S. imports, if/when these tariffs increases are applied, it should translate into higher consumer prices. In turn, higher consumer prices could result in lower consumer demand.
Employment: The U.S. economy is estimated to have added 134,000 jobs in September. Revisions to estimates for previous months resulted in additions for July (from +147,000 to +165,000) and August (from +201,000 to +270,000). The unemployment rate dropped from 3.9% to 3.7% month-over-month in September. The current value is below the lows registered in 2000 and is the lowest reading since the late 1960s. Wage growth year-over-year is estimated at 2.8%. This is slightly lower than the 2.9% increase last month, but the gentle upward trend since 2015 remains intact.
Consumer Confidence & Spending: The Conference Board’s Index of Consumer Confidence increased 3.7 points, rising from 134.7 to 138.4 in September. With the increase, values are approaching the all-time high registered in January 2000 (144.7).
Overall consumer spending increased 0.2% month-over-month in seasonally-adjusted data for August (latest available). Year-over-year, total consumer spending was 3.0% higher. This is the strongest year-over-year growth since October 2015. Consumer spending on apparel was up a very strong 3.0% month-over-month. Year-over-year, consumer spending on apparel was up 7.3%. This is the strongest rate of annual growth since 2010, when year-over-year comparisons were against depressed recessionary levels.
Consumer Prices & Import Data: Lower consumer prices for apparel may have encouraged spending. The Bureau of Labor Statistics CPI for garments, was down both 1.9% month-over-month and year-over-year in August. Average import prices (seasonally-adjusted) for cotton-dominant apparel decreased 2.9% month-over-month in August. Year-over-year, cotton-dominant apparel import prices were 2.4% higher.