Executive Cotton Update - February 2020
Macroeconomic Overview: The Bureau of Economic Analysis estimates that the U.S. economy grew 2.3% in 2019. Forecasts suggest that growth could slow a little in 2020, with many projections falling between 1.9% and 2.1%. For comparison, in 2018, growth was 2.9% and in 2017 growth was 2.4%.
The International Monetary Fund (IMF) recently updated its forecasts for global GDP. Their projection for 2020 is now 3.3%. This is slightly lower than their October estimate (3.4%), but nonetheless calls for an acceleration in global economic activity this year (growth in 2019 estimated to have been 2.9%, which is the slowest since the financial crisis). In 2021, growth is expected to accelerate a little further and reach 3.4%. Projections for both 2020 and 2021 are below levels before the 2018-19 slowdown. In 2017, global growth reached its highest level since the financial crisis (3.8%). In 2018, conditions began to slow in the second half, and growth for the year was 3.6%.
A drag on global growth has been sluggish conditions in advanced economies. This has been especially true in Europe and Japan. In 2019, Eurozone GDP grew only 1.2%. Europe’s largest economy, Germany, grew only 0.5%. For both the Eurozone and Germany, these were the slowest rates of growth in six years. In 2019, Japan grew 1.0%. Among advanced economies, the U.S. continues to post the strongest growth rates. In 2019, growth is estimated to have been 2.3%.
In the report that accompanied their updated forecasts, the IMF indicated that risks have become less tilted toward the downside. There are indications that global manufacturing activity and international trade may have reached a bottom in 2019. Geopolitical headwinds appear to have eased, with the U.S. and China signing the Phase One agreement, the U.S. ratifying the U.S.-MexicoCanada-Agreement (USMCA, the update to NAFTA, Mexico and the U.S. have signed, Canada is beginning the ratification process), and the U.K. formally withdrawing from the E.U. thereby removing some uncertainty from that process.
Nonetheless, the macroeconomic landscape is rapidly evolving. The Phase One deal was signed only a few weeks ago (on January 15th). Since then, the coronavirus outbreak emerged and China announced it would lower tariffs on many U.S. goods. The reduction in Chinese tariffs is scheduled for February 14th. This is the same date that the U.S. will lower its supplemental tariffs from 15% to 7.5% on many imports of consumer goods from China (List 4a, which includes finished apparel and home textiles). The easing of tariffs and trade tensions should be a positive for the global economy, while the coronavirus is an obvious source of concern. The longer and more widespread the outbreak is, the greater the potential damage to Chinese and global economies.
Employment: The U.S. economy is estimated to have added 225,000 jobs in January. Revisions to both November (+5,000 to +256,000) and December (+2,000 to +147,000) were positive. Following these changes, the latest twelve-month average for job gains is now 171,000. Over the same period one year ago, gains averaged 205,000. The unemployment rate increased marginally, from 3.5% to 3.6%, and was a result of a small increase in the number of people wanting to work. Wages increased 3.1% year-overyear in January. Wage growth has been above three percent every month since September 2018.
Consumer Confidence & Spending: The Conference Board’s Index of Consumer Confidence increased 3.4 points month-overmonth in January to 131.6. The current level is near values registered since the spring of 2019 and ranks among the highest recorded. Overall consumer spending rose 0.1% month-over-month in December (seasonally-adjusted) and was 3.3% higher than one year ago. Consumer spending on apparel was down 0.7% month-over-month in December. However, the decrease can be interpreted as a normalization after the strong 2.8% month-over-month increase in October (was -0.2% month-over-month in November). Apparel spending was up 6.0% year-over-year in December. Over the holiday shopping period (Oct-Dec), apparel spending was 4.2% higher.
Consumer Prices & Import Data: The CPI for garments increased 0.5% month-over-month in December (seasonally-adjusted) but was 2.4% lower year-over-year. Average import prices for cotton-dominant apparel were 1.7% higher month-over-month (seasonally-adjusted USD per square meter equivalent or SME) and were 2.1% higher year-over-year.
The volume (SME) of U.S. apparel imports was down 0.3% in 2019 versus 2018. Imports from China were down 5.1%. For cottondominant apparel, the volume from all sources was down 2.3% and imports from China were down 12.4%. These annual decreases mask sharper declines that have occurred since tariffs were raised on most categories of Chinese-made apparel in September. From September through December, total apparel imports (all fibers) were down 8.8% and shipments from China were down 17.0%. Over the same period, total cotton-dominant imports were down 10.7% and imports from China were down 28.4%. The declines in arrivals from all sourcing locations continue to indicate that alternative sourcing locations have not been able to offset losses from China and that there has been a general pullback in orders. The planned reduction in tariffs on Chinese-made apparel in February can be expected to ease the effects on retailers, but may or may not be sufficient to stimulate demand.