U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview
The Bureau of Economic Analysis recently released its first estimate for U.S. GDP growth in the second quarter. At 4.1%, this rate of expansion is the strongest since the third quarter of 2014. In the first quarter, GDP growth was 2.2%. The acceleration in the second quarter was primarily a result of stronger consumer spending and higher exports.
The International Monetary Fund (IMF) released an update to its World Economic Outlook in mid-July. This report indicated that global growth is becoming less evenly distributed. This has been demonstrated by the recent acceleration in growth for the U.S. economy and deceleration in E.U. and Japan. Divergence in growth can cause volatility in exchange rates. While the IMF maintained its forecast for 3.9% global growth in 2018 and 2019, which represents the strongest growth rates since 2011, the IMF also emphasized downside risks to the forecast. Trade actions and reactions were cited as a key source of uncertainty.
The U.S.-China trade dispute continues to escalate. In the latest round, the U.S. threatened to raise duties on a second list of goods valued at $200 billion (released in early July) beyond the initially proposed 10 percentage point increase to a 25 percentage point increase. China responded, indicating that it would expand tariff increases to an additional list of U.S. goods worth $60 billion, with tariff rates planned to increase from 5 to 25 percentage points.
These announcements add to the sets of tariff increases enacted and threatened between the U.S. and China this year. The timeline of events includes the following 1) U.S. tariffs on Chinese washing machines and solar equipment in January, 2) U.S. tariffs on steel imports from all countries in March, including $3 billion of imports from China, 3) China announces tariff increases on a list of U.S. goods worth $3 billion in early April, 4) both sides release lists of goods valued at $50 billion to be hit with 25 percentage point increases in April, 5) of the lists of goods worth $50 billion, tariff increases are implemented by both sides on subsets valued at $34 billion in early July, the remaining subsets valued at $16 billion may or may not be implemented later, 6) the U.S. releases a list of Chinese goods valued at $200 billion that could be hit with a 10 or 25 percentage point tariff increase (currently unknown if tariffs on this list of goods will be implemented, unknown which tariff rates might be applied if implemented), 7) China announces a list for tariffs increases valued at $60 billion that could be hit with tariff increases from 5 to 25 percentage points.
The sum of the value of U.S. goods currently facing or potentially facing tariff increases by China ($3 billion + $34 billion + $16 billion + $60 billion) is $113 billion. This is approaching the total value of Chinese imports from the U.S. in 2017 ($130 billion). In 2017, the U.S. imported $505 billion of goods from China. The current sum of the value of Chinese goods covered or threatened with tariff increases by the U.S. is $253 billion.
Employment
The U.S. economy is estimated to have added 157,000 jobs in July. Revisions to figures for previous months caused the number for May to rise from +244,000 to +268,000 and the number for June to rise from +213,000 to +248,000. Over the first seven months of the year, job growth averaged 215,000. During the same time period last year, job growth averaged 184,000.
The unemployment rate decreased slightly, falling from 4.0% to 3.9%. Average wages increased 2.7%, holding to a level stronger than what has been common since the financial crisis, but weaker than values experienced during other economic expansions.
A lingering question for the economy is what might happen to wages. Traditionally, when the labor market tightens (i.e., when the unemployment rate is low), wages increase. While there has been some improvement, wages have not increased as much as could have been expected given that the unemployment rate is essentially at its lowest level since the 1960s (current value of 3.9% marginally above the value of 3.8% in April 2000, but is otherwise the lowest since 1969). Slow wage growth has been a factor associated with the weak rates of inflation experienced since the last recession. If wages do start to pick up, inflation could accelerate. This should prompt more aggressive increases in interest rates by the Federal Reserve, which could slow economic growth.
Consumer Confidence & Spending
The Conference Board’s Index of Consumer Confidence increased marginally last month, rising from 127.1 to 127.4. Values have been stable for the past ten months, holding near the strongest levels on record.
Overall consumer spending increased 0.3% in seasonally-adjusted data for June (latest month with data). Year-over-year, overall spending was 2.8% higher. After a strong increase in May (+2.2%), apparel spending decreased month-over-month in June (-0.6%). Year-over-year, apparel spending was 2.6% higher.
Consumer Prices & Import Data
Retail apparel prices decreased 1.0% month-over-month in seasonally-adjusted data for June (latest month with data). Year-over-year, retail apparel prices were 1.1% higher. Average prices per square meter of cotton-dominant apparel were up 1.3% month-over-month in seasonally-adjusted data for June and were 3.7% higher year-over-year.
Read the full Executive Cotton Update: August 2018.