U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview
In their latest update, the Bureau of Economic Analysis (BEA) indicated that the U.S. economy surpassed its pre-COVID peak of activity in the second quarter. The data are more challenging to aggregate at the global level, but there are estimates the world may have also surpassed its pre-COVID peak last quarter. Full recoveries only a year after the spread of the worst pandemic in a century are remarkable. However, the virus has had meaningful negative impacts. Pulling slightly beyond previous volumes of activity means that stronger growth that could have been enjoyed in the absence of the pandemic was missed.
In the third quarter and beyond, the U.S. economy faces cross-directional influences. Consumer demand should support further economic growth. Consumer confidence has returned to the near-record levels registered before the pandemic. Alongside recent wage growth and the savings accumulated during the pandemic, optimism could be expected to contribute to healthy rates of spending growth into the future.
A resurgence in COVID and its associated constraints on the supply side may impede some of that growth in spending. The Delta variant has already caused restrictions in several important manufacturing countries. A current hotspot is Vietnam (the second-largest source for U.S. cotton-dominant apparel imports), and there are concerns that the virus may also lead China to reimpose regulations (top source for U.S. cotton-dominant apparel imports).
The shuttering of factories compounds complications posed by shipping bottlenecks. U.S. inventory-to-sales ratios across a range of industries have been setting record lows, and the cost of getting goods to market has been rising. To the extent that these costs are passed through to consumers, higher prices could eventually affect retail demand. For apparel, prices have increased month-over-month in each of the past three months. However, COVID caused a price drop, and recent increases have not been enough to lift price levels above those before the pandemic.
Concerns about inflation can prompt the Federal Reserve to increase interest rates, which can slow economic growth. Recent statements from officials with the central bank suggest that rate increases could start in early 2023. Markets can be forward-looking, but this timeframe would still allow for borrowing to occur at rates near zero for more than a year.
Employment
In July, the U.S. economy was estimated to have added +943,000 jobs. This is the largest monthly increase since August 2020. Revisions to figures for previous months were positive, with the estimate for May rising +31,000 positions to +583,000 and the estimate for June rising +88,000 positions to +938,000. The 12-month average for job gains is 605,000. Since COVID, there has been a net loss of 5.7 million positions.
The unemployment rate fell 0.5 points to 5.4%. At the worst point following the onset of COVID, the unemployment rate was 14.8%. Before COVID, in February 2020, the unemployment rate was 3.5%, which was the lowest level in more than 50 years.
The spread of the Delta variant of the COVID virus may prompt additional restrictions on consumer activity and threaten to reverse some recent improvements in the labor market. However, that threat has yet to materialize in data. Initial claims for unemployment insurance have set new post-pandemic lows in recent months and have been below 400,000/week in five of the past six weeks.
Consumer Confidence & Spending
The Conference Board’s Index of Consumer Confidence was nearly unchanged in July. The current value of 129.1 is the highest since the pandemic and is nearly equal to the values posted before its onset (132.6 in February 2020).
Overall consumer spending increased 0.5% month-over-month in June, while spending on apparel increased 2.0%. Year-over-year comparisons are affected by the sharp contraction that occurred one year ago. Overall spending was up 9.2% relative to June 2020, and spending on clothing was up 24.1%.
Consumer Prices & Import Data
Retail prices for apparel increased 0.8% month-over-month in June. Year-over-year, clothing prices were 4.4% higher. However, the current value for the CPI for apparel is still below values before COVID (113.1 in June 2021, 115.7 in February 2020).
Average prices for cotton-dominant apparel imports have also been rising. In terms of USD per square-meter equivalent, the average cost was $3.14/SME in June. This is 6.5% higher than the record low registered in March ($2.95/SME) but 7.6% below the levels near $3.40/SME that were common before the pandemic.