U.S. Macroeconomic Indicators & the Cotton Supply Chain
September 2018
Macroeconomic Overview: In the second quarter, consumer spending supported the strongest rate of GDP growth in nearly a decade (current estimate is 4.2% seasonally-adjusted annual rate). Momentum appears to be carrying through into the third quarter, with the rate of consumer spending in July (latest available) ranking as the highest of the year (+2.9% year-over-year in real terms).
Benefits from healthy consumer spending were apparent in financial reports spread across a range of publicly-traded retailers. This included many traditionally brick-and-mortar companies, such as Target, who reported heavy foot traffic and the strongest same store sales growth in thirteen years. Paired with rising on-line sales, this pulled Target’s share price to new all-time highs. Target’s average share price in August was up 14% versus the average in January. For comparison, the S&P 500 index was up 3% over the same time period.
Reflective of an improved financial outlook across the retail sector, shares for other traditionally brick-and mortar companies have also enjoyed strong gains. Examples include Kohl’s (+23% Jan-Aug), Macy’s (+45% Jan-Aug), TJX (+32% Jan-Aug), and the Ascena Retail Group (owner of Ann Taylor, LOFT, Lane Bryant, as well as several other apparel stores and brands, +106% Jan-Aug). Despite widespread improvement, increases in stock prices were not universal, with share values declining for GAP (-8%, Jan-Aug), Wal-Mart (-10% Jan-Aug), JC Penney (-46% Jan-Aug), and Sears (-54% Jan-Aug). In a further indication of the consumer buying increasingly on-line, Amazon (+46% Jan-Aug) recently became the second company (after Apple) to reach a market capitalization of more than one trillion dollars. For context, the value of Amazon is more than twice the sum of the market capitalization of Wal-Mart ($283 billion), Costco ($107 billion), and Target ($47 billion).
Last month, the Bureau of Economic Analysis completed annual revisions to consumer spending and income estimates. A notable result of those revisions was a substantial increase to figures concerning savings rates. These updates doubled recent estimates for savings rates, from levels near three percent to those near six percent (due to a change in methods used to count income). Additional savings suggest consumers have a greater ability to sustain spending growth than previously believed.
Exchange rate volatility remains a feature of the global economy. Over the past month, the U.S. dollar registered new all-time highs against the Turkish lira (TRL), the Brazilian real (BRL), and the Indian rupee (INR). Since April, when the dollar began to accelerate gains against many currencies, the dollar has risen 63% against the Turkish lira, 25% against the Brazilian real, 10% against the Indian rupee, and 9% against the Chinese RMB. Many of these countries are major traders at different stages of the global apparel supply chain and there can be consequences for supply chain pricing. All else being equal, prices for imports expressed in dollar terms (e.g., fiber imports into Turkey) become more expensive when a currency weakens against the dollar. Conversely, prices received by producers for exports become higher (e.g., fiber exports from Brazil and India). Further downstream, prices for imports of finished goods into the U.S. (all else being equal) become less expensive when the currencies from apparel exporters weaken against the dollar.
Employment: The U.S. economy is estimated to have added 201,000 jobs in August. Revisions to estimates for previous months lowered figures for payroll expansion in June and July (from +248,000 to +208,000 for June, and +157,000 to +147,000 for July). The unemployment rate was unchanged at 3.9%, which ties the lowest level reached in 2000, but is otherwise the lowest level since the late 1960s. The rate of growth in wages ticked higher in August. Climbing beyond the values between 2.5% and 2.7% that have been common over the past couple years, the 2.9% year-over-year increase last month is the largest since the recession. If sustained, a trend towards stronger wage gains has upward implications for inflation, interest rates, and the dollar.
Consumer Confidence & Spending: The Conference Board’s Index of Consumer Confidence increased in August, rising 5.5 points from 127.9 to 133.4. The current value is slightly above levels maintained over the past year and is the highest reading in nearly two decades.
Overall consumer spending increased 0.2% month-over-month and 2.8% year-over-year in July. This represented the strongest rate of year-over-year growth since November 2017. Apparel spending figures are more volatile. In July, apparel spending was estimated to have increased 1.9% month-over-month (was -0.6% month-over-month in June, +2.1% in May). Year-over-year, apparel spending was 4.6% higher. This is the strongest year-over-year growth since the 2017 holiday sales period (+4.6% year-over-year in December 2017, +6.9% in November 2017).
Consumer Prices & Import Data: In July, average retail apparel prices (seasonally-adjusted) were 0.7% lower month-over-month but were essentially unchanged (+0.2%) year-over-year. The same month, average import costs for cotton-dominant apparel were 1.4% higher month-over-month and 5.8% higher year-over-year.
