Executive Cotton Update
U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview: The Federal Reserve increased interest rates by 0.50 percentage points after its meeting in the middle of December. This increase was smaller than the four consecutive 0.75 point increases made after the four previous meetings. The effective Federal Funds rate that the central bank manages is currently between 4.25-4.50%, which is the highest since 2007.
Inflation rates have been easing. Year-over-year, the rate of change in the Bureau of Labor Statistics CPI covering all goods and services has gotten smaller in each of the past five months (was 9.1% in June, 8.5% in July, 8.3% in August, 8.2% in September, 7.8% in October, and 7.1% in November). Another measure of aggregate prices, the price deflator from the Bureau of Economic Analysis (BEA), is more closely followed by the Fed. That price index has also been easing. It was 7.0% higher in June but was between 6.2% and 6.4% from July to September and then dropped below 6.0% year-over-year by November. Year-over-year rates for the “core” price deflator from the BEA that strips out food and energy prices peaked at 5.4% in February 2022, but it has not decreased much since then. Values for the core deflator in the remainder of 2022 were about five percent higher than in 2021.
Since inflation appears to have stopped accelerating, the trajectory of future interest rate changes has become a central question. Comments from officials with the Federal Reserve underlined their commitment to controlling inflation and a willingness to slow growth to achieve that objective. More specifically, Fed chairman Jerome Powell has suggested that interest rates will need to remain higher for longer. Powell also acknowledged that the effects of rising interest rates on economic activity are lagged and that there is considerable uncertainty about the possibility of a recession, stating that the probability and severity of a potential contraction are not knowable. The official target rate the Federal Reserve has for inflation is 2.0%, which is still less than half of the most commonly tracked measures.
An asset for the U.S. economy has been the labor market. The unemployment rate remains safely below four percent and is low by historical standards. Although it has not been able to surpass inflation, wage growth has been steady near five percent, beyond anything registered in the decade between the financial crisis and the onset of COVID. Nonetheless, inflation has been increasing faster than wages since the first quarter of 2021, implying that consumer spending power has been falling despite higher income. One result is that consumers have been relying increasingly on savings and debt to fund new purchases. Over time, the reliance on debt could become a liability for consumers and the economy, especially because debt has become more expensive with increased interest rates.
Employment: The U.S. economy was estimated to have added +223,000 jobs in November, near the levels posted over the past four months. Revisions to figures from the last two months were negative (October -21,000 to +263,000 and November down -7,000 to +256,000). The current twelve-month average is +375,000 jobs.
The unemployment rate decreased slightly, from 3.6% to 3.5%, and remains low by historical standards. Wages were up 4.6% year-over-year in December. This is the lowest rate of annual gain since August 2021 and is below current rates of inflation.
Consumer Confidence & Spending: The Conference Board’s Index of Consumer Confidence posted a +6.9 point month-over-month increase in December. The current level (108.3) is the highest since April 2022 but is below the levels near 130 registered in the summer of 2021 and before COVID in early 2020. The long-term average is 94.0 (since 1970).
In November, consumer spending was flat month-over-month (+0.01%) and +2.0% higher year-over-year. Spending on clothing was -0.8% lower month-over-month and up 0.1% year-over-year.
Consumer Prices & Import Data: Retail prices for garments increased +0.3% month-over-month in November. Year-over-year, retail apparel prices were +4.0% higher. Compared to the average before COVID (2019 calendar year), clothing prices were +1.7% higher.
As represented by the cost per square meter equivalent (SME) of cotton-dominant apparel, import prices were $4.31/SME in seasonally-adjusted terms for November. Apart from the reading in October, this is the highest value on record. Sourcing costs have been volatile recently, with the latest highs following a near-record low posted in March 2021 ($2.97/SME).
Apart from the months most affected by COVID shutdowns (March 2020-June 2020), seasonally-adjusted (SA) import volumes in October were the lowest since 2005 (in terms of SA SMEs). This followed record high import volume in March and represents a -36% reduction in shipments in just eight months. Consumer spending during the holidays was generally reported as stronger than feared and may help alleviate issues involving retailer inventories. However, there are other challenges for retailer order demand, including higher sourcing costs and fears that the lagged effects of interest rate increases will weigh on consumer demand in 2023.