U.S. Macroeconomic Indicators & the Cotton Supply Chain
May 2019
Macroeconomic Overview: The U.S. Bureau of Economic Analysis (BEA) published preliminary estimates for GDP growth in the first quarter. Given the government shutdown and weather-related issues, expectations were that growth in the first quarter would have been weak. Contrary to expectations, the figure of 3.2% (seasonally-adjusted annualized rate) was higher than in the fourth quarter (2.2%) and would rank as the strongest rate in either 2016 or 2017 (GDP grew 4.2% in Q2 2018 and 3.4% in Q3 2018, but has otherwise been below 3.2% since Q2 2015).
The stronger than expected increase in GDP in the first quarter was primarily a result of stronger than expected growth in state and local government spending, inventory accumulation, and the combination of higher exports and lower imports. The inventory component of GDP is notorious for its difficulty to estimate. Real final sales to domestic purchasers, a measure derived by the BEA that does not include inventory, was the lowest (1.4%) since Q4 2015. Growth in consumer spending was also weaker in the first quarter (1.2%) than in the fourth quarter (2.5%) and was the weakest rate in a year.
The International Monetary Fund (IMF) released an updated set of forecasts and analysis for the global economy in April. This report was issued before the latest GDP figures were published by the U.S. and China (6.4% rate of annual growth in the first quarter), both of which were better than anticipated. In the IMF’s analysis, a focus was the deceleration that has occurred over the past year and how expectations for strong growth that were in place last spring were replaced by recent concerns of a global slowdown. Factors identified as contributing to the reversal include recessions in Turkey and Argentina, the disruption in Germany’s auto sector, tighter credit policies in China, tighter monetary policy by central banks in developed economies, and the U.S.-China trade dispute.
After several months of negotiations that appeared to move the two sides closer to a resolution, the President Trump threatened two new rounds of tariff increases. The list of goods valued at $200 billion that was subject to 10 percentage point rise in rates in September was threatened with another 15 percentage point increase. If realized, this would bring the total increase for that list to 25 percentage points. Beyond that, President Trump also threatened to increase tariffs by 25 percentage points on any U.S. imports from China that have not yet been affected by increases. Until now, the goods subjected to higher tariffs have not included many consumer goods. However, if this round of increases happens, it would include apparel. China’s share of U.S. apparel imports has held steady if not increased slightly (at levels just over 40%), since threats to cover the entire set of U.S. imports from China were initially made last summer.
The trade dispute is a source of uncertainty. Nonetheless, the IMF expects global growth to accelerate in the second half of the year. Reasons cited by the IMF for the pickup include actions already taken by central banks, such as the pause in interest rate increases by the Federal Reserve and the adoption of more accommodative positions by Chinese, European, and Japanese central banks. On an annual basis, however, IMF forecasts suggest global growth in 2019 (3.3%) will be slower than in 2017 (3.8%) and 2018 (3.6%). The IMF’s current forecast for 2020 (3.6%) predicts that the acceleration expected late in 2019 will carry through into next year.
Employment: The U.S. economy is estimated to have added 263,000 jobs in April. This represents a strong increase relative to values posted in past two months. Following revisions, job growth in February is currently estimated to have been +56,000 (revised up from last month’s estimate of +33,000) and job growth in March is currently estimated to have been +189,000 (revised down from last month’s estimate of +196,000). Over the past twelve months, the average monthly growth in payrolls has been 213,000. Over the same time period one year ago, the average was 192,000.
The unemployment rate fell from 3.8% to 3.6%. This is the lowest rate since December 1969. Beyond job growth, a decrease in the labor force participation helped to lower the unemployment rate (which is the ratio of people looking for work relative to those wanting to work). Average wages rose 3.2% year-over-year in April. The is the seventh consecutive month that wages have increased by more than three percent. Wages began to trend higher in early 2018 and recent gains of over three percent are the strongest since the financial crisis.
Consumer Confidence & Spending: The Conference Board’s Index of Consumer Confidence increased five points, to 129.2 in April. Since December, there have been a series of relatively large month-over-month changes. Despite the volatility, values remain high compared to historic averages.
Overall consumer spending increased 0.7% month-over-month (seasonally-adjusted data) and was up 2.9% year-over-year in March. Apparel spending increased sharply in March. The 3.7% gain relative to February represented the largest monthly increase (subject to revision) in the last ten years. Year-over-year, consumer spending on clothing was up 4.6%, which is the strongest since September.
Consumer Prices & Import Data: Retail apparel prices decreased month-over-month 1.9% in March. Year-over year, consumer prices were 2.3% lower. Average import prices for cotton-dominant apparel were up 1.3% month-over-month (seasonally-adjusted) and up 4.1% year-over-year in February (latest available data).
