U. S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview: Concern about slowing economic conditions has resurfaced. Indices of manufacturing activity, which can serve as leading indicators for overall economic activity, signaled contraction for the U.S., the U.K., Germany, South Korea, and Japan last month. It was the first time since 2016 that U.S. manufacturing activity shrank. In the Institute for Supply Management (ISM) survey used to generate the U.S. index, trade-related uncertainty was cited as the most significant issue facing manufacturers.
The ISM report was issued after a month of further escalation in the U.S.-China trade dispute. On August 1st, the U.S. announced it was planning to increase tariffs on all Chinese goods not covered by previous rounds of increases. On August 13th, the U.S. followed up with details indicating that this next increase would be implemented in two steps. The first step was applied to a set of goods referred to as List 4a (valued at $112 billion) on September 1st. A second step (List 4b, valued at $160 billion) is planned to take effect December 15th. Both List 4a and 4b were initially supposed to face ten percentage point increases.
A factor that was used to determine which goods were assigned to List 4a or 4b was China’s market share of each import category (8-digit HS code). Goods with Chinese share below 75% were assigned to List 4a (September implementation). Goods with Chinese share above 75% were assigned to List 4b (December implementation), allowing retailers selling goods with sourcing concentrated in China a little additional time to try to diversify.
Virtually all apparel and home textiles escaped previous rounds of increases, but are covered by Lists 4a and 4b. Goods classified under HS Chapters 61 (Knit Apparel), 62 (Woven Apparel), and 63 (Made-Ups, spanning most home textiles including sheeting, bedding, and towels) are split across these two lists. These lists are built from 8-digit HS codes (in the U.S., the most specific product classifications are at the 10-digit level) and there are far more apparel goods on List 4a (549 8-digit HS codes) than 4b (77 8-digit codes). In terms of weight, List 4a represents much more volume, with 1.5 million tons of imports from China in 2018 and 4.5 million tons of imports from all locations (China’s share was 35%). List 4b represented 172,714 tons of imports from China in 2018 and 206,769 from all locations (China’s share was 82%).
The total value of U.S. goods imported by China ($120 billion in 2018) is much less than the total value of goods that the U.S. imports from China ($540 billion in 2018). With initial tariff increases symmetric in terms of the value of goods covered ($34 billion in July 2018 and $16 billion in August 2018), China quickly became limited by an absence of additional goods it could hit with tariff increases in later rounds. Since last September, essentially all Chinese imports from the U.S. have been subjected to increased tariffs.
Correspondingly, China could not retaliate to the increases announced by the U.S. last month by expanding the set of goods facing higher tariffs. Instead, China reacted by raising tariffs on U.S. goods that were already subject to higher tariffs by another 5 or 10 percentage points. These increases cover goods collectively valued at $75 billion and will be implemented in two steps, one on September 1st and another on December 15th. U.S. cotton fiber is on the list of goods facing an additional 5 point increase in December, meaning the additional tariff applied to U.S. cotton should soon rise from a 25 to a 30 percentage point increase relative to where duties were before July 2018.
The U.S. responded to the Chinese announcement by also raising tariffs. Goods already subjected to a 25 percentage point increase (Lists 1, 2, and 3) were subjected to an additional 5 point increase (to 30 percentage points total) in October. Lists 4a and 4b, which were initially slated to face 10 percentage point increases now face 15 point increases. From the U.S. side, the latest tariff increases put further pressure cotton prices and retailer profitability. From the Chinese side, a slowdown in export demand and slower economic growth should weigh on manufacturers’ order volumes.
Employment: The U.S. economy added 130,000 jobs in August. Revisions to estimates for June and July were both negative, with the figure for June dropping from +193,000 to +178,000 and the figure for July dropping from +164,000 to +159,000. Following the latest monthly revisions, job gains over the past twelve months averaged +173,000. Over the same period last year, job growth averaged +212,000. The unemployment rate was stable at 3.7% in August. Wages were 3.2% higher year-over-year last month, equal to the average annual rate of increase over the past twelve months.
Consumer Confidence & Spending: The Conference Board’s Index of Consumer Confidence was nearly unchanged in August (135.1 down 0.7 from 135.8 in July). Values remain near the all-time high registered in the early 2000s. After a slowdown in June, overall consumer spending rebounded in July. In July, overall spending up 0.4% month-over-month and up 2.7% year-over-year. After decreasing 0.3% month-over-month in June, consumer spending on apparel climbed 0.4% in July and was up 2.2 year-over-year.
Consumer Prices & Import Data: After rising 1.0% month-over-month in June, the CPI for apparel rose another 0.6% month-over-month in July. Despite the back-to-back monthly increases, the CPI was still down 0.6% year-over-year in July. In seasonally-adjusted terms, the average price per square meter equivalent of cotton-dominant apparel imports increased slightly month-over-month in June (from $3.46/SME to $3.47/SME). Year-over-year, the average import price for cotton-dominant apparel was 2.3% higher.
China’s share of cotton-dominant apparel imports was stable at a level near 27% in July (seasonally-adjusted data). China’s share of U.S. apparel imports of all fibers was also stable at a level near 41%. The tariffs planned in September and December threaten this stability, but there is no evidence of a major shift in sourcing away from China yet.