U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview: January brought about not only a change in year, but also change in decade. Both the past year and decade brought important change to the U.S. and global economies. The past decade was dominated by the recovery from the financial crisis and can be characterized by a global slowdown in GDP growth rates. The deceleration has been more pronounced in developed economies but has also been a feature of emerging markets.
Slower growth has kept stimulative policies in place, most notably the maintenance of extremely low interest rates by central banks in the U.S., the E.U., and Japan. The Federal Reserve began a process of increasing interest rates in 2015 but was forced to reverse course in 2019 due to growth-related concerns. The emergence of the trade dispute in 2018 has been associated with the recent slowdown in global activity. The phase one agreement that is expected to be signed this month could represent a turning point away from further escalation but could also just signify a respite. Regardless of the eventual direction in negotiations, consequences of the evolution in the trade dispute can be expected to be felt in supply chains beyond the U.S. and China in 2020.
Employment: The U.S. added 266,000 jobs in November. This was the largest monthly increase since January. Revisions to figures for September (+13,000 to +193,000) and October (+28,000 to +156,000) were both positive. Over the past twelve months, the average monthly increase has been 184,000. During the same period last year, job gains averaged 219,000.
Year-over-year growth in wages was 2.9% last month. Wage growth appears to have formed a peak in February 2019 (at 3.4%) and has since been trending lower. Nonetheless, wage growth remains above levels registered between the financial crisis and the first half of 2018. The unemployment rate was unchanged at 3.5% in November and continues to hold to the lowest levels since the late 1960s.
Consumer Confidence & Spending: The Conference Board’s Index of Consumer Confidence was generally unchanged month-over-month in December (-0.3 points to 126.5). This is nearly equal to the value one year ago (126.6 in December 2019). Recent readings are below the levels near 135 that were posted in July and August but remain high compared to long-term averages.
Overall consumer spending increased 0.3% month-over-month in November and was 2.4% higher year-over-year. Spending on apparel decreased 0.2% month-over-month but was up 2.4% year-over-year.
Consumer Prices & Import Data: The CPI for garments was virtually unchanged month-over-month in November (+0.01%) but was 2.5% lower year-over-year. The average cost per square meter of imported cotton-dominant apparel decreased $0.01 cent/square-meter equivalent (SME) or -0.3% month-over-month in seasonally-adjusted data for November. Year-over-year, average import costs per SME were 2.5% lower.
Effects of U.S. tariffs on Chinese-made apparel continue to surface in U.S. trade data. In the latest available figures (November), China’s share of cotton-dominant imports was 22% (seasonally-adjusted). Before tariffs were implemented in September, the average for Chinese share in 2019 was 27%. Last November, Chinese share of U.S. cotton-dominant imports was 29%.
The decreases in Chinese share enabled increases in share from other sourcing options. Collectively, ASEAN nations have surpassed China as the largest source of cotton-dominant apparel (seasonally-adjusted share from ASEAN members exceeded Chinese figures each month since September). In November, ASEAN share of U.S. cotton-dominant imports was 2.2% higher year-over-year (Vietnamese share was up 1.4% and Cambodian share was up 1.7%). The South Asian (Bangladeshi share up 2.0% year-over-year in November, Indian share up 0.7%, Pakistani share up 0.4%) and CAFTA regions (+1.2%) also have been able to increase market share.
However, an important feature of U.S. imports since tariff increases were implemented is that there has been a reduction in total imports alongside the steep decreases in shipments from China. In terms of SMEs, the sum of U.S. cotton-dominant imports between September and November from the world was down 10% (reduction in volume from China was 29%). The increases in share from competing countries can mask it, but the global decline means that competitors have not been able to fully compensate for the losses from China and that there has been a net loss in apparel demand.
Additionally, it is possible for countries to increase market share even with declining volume by simply shipping at a less negative rate than the global figure. For example, India shipped 2.6% less to the U.S. in terms of SMEs September-November but was able to increase share over the same time period (global decline was 10%). Collective imports from the world outside China were down 1.0% September-November. The net reduction in demand for cotton-dominant apparel is mirrored in data for apparel of all fibers and serves as evidence that there are spillover effects of the tariffs extending beyond China, and that retailer demand has been broadly affected.