U. S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview: According to the advance (preliminary) estimate released by the Bureau of Economic Analysis, the U.S. grew at a 2.1% annualized rate in the second quarter. In the first quarter, the U.S. economy grew 3.1%. The slowdown in the second quarter was primarily a result of a sharp reversal in business inventories, which went from a 6.2% rate of growth in the first quarter to a 5.5% reduction in the second quarter. Consumer spending strengthened in the second quarter, rising from 1.1% to 4.3% quarter-over-quarter. A strong labor market that has pushed unemployment to multi-decade lows and which has started to lift wages has supported spending growth.
The International Monetary Fund (IMF) lowered its forecasts for global GDP last month (from the 3.3% projected in April to 3.2% for 2019, from the 3.5% projected in April to 3.4% for 2020). In the accompanying report, the IMF indicated that risks remain to the downside. The list of specific risks featured the impact of trade tensions. A central concern was the U.S.-China dispute, but also included Brexit.
Recent talks between the U.S. and China did not result in significant progress. In response, the U.S. initiated plans to increase tariffs on all goods not covered by previous rounds of increases (collectively valued at $300 billion) by ten percentage points. This set of goods includes U.S. imports of Chinese apparel and home textiles, as well as many other consumer goods (previous rounds of increases were concentrated on intermediate goods used by manufacturers). China represents 40% of all U.S. apparel imports and 30% of U.S. cotton-dominant apparel imports, so these increases have the potential for increasing consumer apparel prices. A response to the increase in U.S. tariffs has been a decline in the Chinese RMB against the USD. For the first time since 2008, it takes more than seven RMB to equal the dollar. The depreciation of the RMB relative to the USD will offset some of the effects of higher tariffs on sourcing costs.
Due to concerns about future growth, the Federal Reserve lowered interest rates for the first time since 2008 at its meeting in late July. Last year, the Federal Reserve increased rates four times, so the decrease represents a significant reversal in policy. The Federal Reserve indicated that they have a favorable outlook for the U.S. economy and that the decrease is designed to support it. The decrease was motivated by concern from downside risks, including a weaker global outlook and trade-related uncertainty.
Central banks and governments in other major economies have also moved to support growth by lowering rates. The Euro Zone expanded at a 0.8% annualized rate in the second quarter (growth was 1.8% in the first quarter), and the Europen Central Bank is widely expected to lower interest rates in September. China has already implemented multiple rounds of stimulus this year. Despite those efforts, the annualized rate of growth in China was 6.3% in the second quarter, which is the slowest rate in 27 years.
Employment: The U.S. economy added 164,000 jobs in July. Revisions to estimates for May and June were both negative, with the figure for May falling from +72,000 to +62,000 and the figure for June falling from +224,000 to +193,000. With these changes, job gains over the past twelve months averaged 187,000.
The unemployment rate held steady at 3.7%. This level is the lowest since the late 1960s. Wages were 3.2% higher year-over-year in July. Wage growth has been sluggish since the financial crisis. It was not until August 2018 that wages were able to climb above three percent.
Consumer Confidence & Spending: Consumer confidence increased sharply in July, rising to 135.7. This is the highest value in 2019 and is the third-highest value since the financial crisis (was higher in October and November 2018).
Overall consumer spending rose at the slowest annual rate in five months in June, when it was up 0.2% month-over-month and up 2.5% year-over-year. Consumer spending on apparel decreased slightly month-over-month (-0.1%). However, this followed three months of strong increases, and clothing spending was up 4.3% year-over-year.
Consumer Prices & Import Data: The CPI for apparel, representing retail garment prices, rose 1.0% month-over-month in June. The increase followed three months of decline and ran counter to the downward trend in retail apparel prices since early 2018. Year-over-year, the CPI was down 1.7%. Relative to early 2018, retail prices were 2.2% lower.
In seasonally-adjusted terms, the average price per square meter equivalent of cotton-dominant apparel imports decreased slightly month-over-month in June (from $3.48/SME to $3.46/SME). Year-over-year, the average import prices for cotton-dominant apparel was 2.3% higher. China’s share of cotton-dominant imports was stable at a level near 28% in June (seasonally-adjusted data). China’s share of U.S. apparel imports of all fibers was also stable near 40%. The tariff increases planned in September may alter this stability, but the series of threats issued since last summer have not led to a major shift in market share out of China yet.