Executive Cotton Update
U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview: The U.S. Bureau of Economic Analysis released its initial estimate of -0.9% for GDP growth in Q2 2022. This was the second consecutive quarter when the economy contracted (-1.6% in Q1 2022), which meets the unofficial definition of a recession (U.S. recessions are officially delineated by the National Bureau of Economic Research, a trade group that releases their determinations with a lag). Regardless of whether the U.S. officially entered a recession, growth has slowed. The U.S. came into this slowdown with a strong labor market and a surge in consumer wealth (housing and stock market values rose with COVID stimulus). Consumers’ financial situation could provide some cushion for spending, but the support may be transient given inflation and slower growth.
The Federal Reserve is at the center of discussions regarding inflation and the trajectory of the U.S. economy. For much of the modern era (data since 1954), the Federal Funds rate that the Federal Reserve controls has been higher than the overall inflation rate. The opposite has been true since the financial crisis. Even after the latest 0.75 point increase in interest rates, the Federal Funds target rate is between 2.25-2.50%. The latest inflation reading is 9.1% (June). The gap between these two series indicates that the Federal Reserve has plenty of room to increase interest rates further. However, the faster the Federal Reserve increases interest rates, the more susceptible the economy may be to a deeper downturn.
Inflation is a global issue and a concern for economies and central banks worldwide. The International Monetary Fund (IMF) recently updated its forecasts for economic growth in late July. Global GDP growth is now expected to reach only 3.2% in 2022 and only 2.9% in 2023. The current figures are much lower than estimates released earlier in the year. In January, the IMF forecast that the world economy would grow 4.4% in 2022 and 3.8% in 2023. In April, after the invasion of Ukraine, IMF forecasts suggested global growth rates of 3.6% for both 2022 and 2023.
Global economic growth is closely associated with demand for commodities, including cotton. Expectations of slower global growth have already translated into sharp decreases for a range of commodity prices, including cotton. Price decreases at the front end of supply chains may provide some relief for inflationary pressures. Other contributors to inflation remain. An example is wage growth, which continues to hold near five percent. For comparison, in the period between the financial crisis and COVID, wage growth peaked at 3.5%. Higher wages can help consumer spending, but they also are a cost for businesses. To the extent these costs are passed on to consumers, wage growth can contribute to inflation.
Employment: The U.S. economy was estimated to have added +528,000 jobs in July. With last month’s job growth, the count of U.S. workers fully recovered from the 22.0 million jobs lost with the onset of COVID. Revisions to previous months were positive (May up +2,000 to +384,000, June up +26,000 to +398,000). The twelve-month average for job gains is +512,000. The unemployment rate decreased marginally, from 3.6% to 3.5%. This is the lowest value since the pandemic, and it is equal to the historically low levels before the outbreak. Wages were up 5.2% year-over-year in July, slightly higher than the average over the past two years. Continued strength in the labor market gives the Federal Reserve more room to increase interest rates.
Consumer Confidence & Spending: The Conference Board’s Index of Consumer Confidence decreased -2.7 points month-over-month in July. This followed a -5.4 point drop in May and a -4.8 point drop in June. The current level for the index (95.7) is the lowest since February 2021 (95.2). After COVID, the index climbed as high as 128.9 (June 2021).
In June, overall consumer spending increased +0.1% month-over-month in inflation-adjusted terms. Year-over-year, real spending was +1.6% higher. Spending on garments decreased -0.4% month-over-month and was down -2.6% year-over-year. Relative to the same month in 2019 (pre-COVID), spending on apparel was 23.0% higher. Over the long term, average annual growth in consumer spending on clothing is near two percent. While the growth rate has slowed in recent months, spending remains elevated compared to levels before the pandemic.
Consumer Prices & Import Data: The CPI for apparel increased +0.5% in June. Year-over-year, retail clothing prices were up +5.1% higher. Despite the recent increases, retail prices for clothing are only 1.9% higher than the average from 2019. Overall prices (CPI for all goods and services) were 15.9% higher in June versus the average from 2019.
Sourcing costs continue to rise. The latest seasonally-adjusted cost per square meter equivalent (SME) of cotton-dominant apparel was the highest since 1992 ($3.86/SME in June). The latest reading is +23% higher year-over-year and up +30% versus the post-COVID low set in March 2021 ($2.97/SME).