U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview
The International Monetary Fund (IMF) released an updated set of global estimates for economic growth in late January. The headline for the report was “Inflation Peaking Amid Low Growth”, suggesting that while a major challenge for the global economy may be fading, another remains.
After growth forecasts were repeatedly lowered in 2022, a notable change in the latest round of revisions was that forecasts for world GDP were increased. The current projection for 2023 is +2.9%, which is +0.2 percentage points higher than the +2.7% figure released in October (+2.7%). Despite the upward revision, the January number still calls for a rate of global economic growth that is nearly one full percentage point below the +3.8% average from 2000-19. The numbers that describe world GDP growth are small, but this represents a -24% decrease in the growth rate relative to the average over the first two decades since the year 2000.
One reason IMF growth projections were increased was that consumers in the U.S. and European Union proved more resilient to inflation than was feared. Factors that contributed to consumer demand included the release of pent-up demand following COVID, strong labor markets that supported wage gains, savings that were deployed to support spending, and easing cost pressures from the supply side as logistical bottlenecks were relieved.
While several of these factors may continue to support growth in 2023, but savings cannot be drawn down indefinitely. In the U.S., savings rates have fallen below three percent. There is only one other period on record when savings have been so low (data back to 1960, the other period of low savings was in 2005, around that decade’s peak in the housing market). Wage growth has been strong, but it remains below the overall inflation rate, requiring consumers to rely on savings to support spending.
If an eventual pullback in consumer spending surfaces, it will weigh on overall growth. In the fourth quarter, the U.S. Bureau for Economic Analysis (BEA) estimates the economy grew at a +2.9% annualized rate. For the 2022 calendar year, the BEA estimates U.S. growth was +2.1%. The IMF is forecasting U.S. GDP will expand +1.4% in 2023 and +1.0% in 2024.
Interest rates tend to have a lagged effect on the economy, and the series of increases in interest rates throughout 2022 is expected to weigh on growth into the future. The Federal Reserve increased rates +0.25 points after its latest meeting on February 1st. The current range for the Federal Funds rate that the central bank controls is between 4.50% to 4.75%. It was nearly zero one year ago.
Employment
The U.S. economy was estimated to have added +517,000 jobs in January. This is the strongest increase in five months (was +568,000 in July) and nearly double the level in December (+260,000). Revisions to figures from the last two months were positive (November +34,000 to +290,000 and December +37,000 to +260,000). The current twelve-month average is +414,000.
The unemployment rate decreased slightly, from 3.5% to 3.4%, and ranks among the lowest values on record (was only this low in the late 1950s and late 1960s). Wages were up +4.4% year-over-year in January. Wage growth has been trending lower since March 2022, when it reached +5.9%. The overall inflation rate was +6.5% in December.
Consumer Confidence & Spending
The Conference Board’s Index of Consumer Confidence decreased -1.9 points month-over-month in January. The current level (107.1) is higher than most values posted in the second half of 2022, but is lower than levels recorded in most of 2021. The long-term average is 94.0 (since 1970).
In November, total consumer spending was down (-0.3%) month-over-month but +2.2% higher year-over-year. Spending on clothing was -1.5% lower month-over-month but up +3.4% year-over-year.
Consumer Prices & Import Data
Retail prices for garments increased +0.7% month-over-month in December. Year-over-year, retail apparel prices were +3.6% higher. Compared to the average in 2019 (before COVID), clothing prices were +2.5% higher. Compared to the average in 2018, clothing prices in December were up only +0.7%.
As represented by the cost per square meter equivalent (SME) of cotton-dominant apparel, import prices were $4.26/SME in seasonally-adjusted terms for December. Apart from the readings in October and November, this is the highest value on record. Import costs have been volatile, with recent high costs following a near-record low posted in March 2021 ($2.98/SME).
There has been volatility in import volumes as well. For the 2022 calendar year, U.S. apparel imports were +0.4% higher year-over-year in terms of SME. However, annual figures mask sharp monthly changes. In the first half of 2022, import volumes set records. Excluding COVID, monthly imports in 2022 touched both the highest (April) and lowest volumes (November) recorded since 2005. From peak to trough, the swing in monthly volumes was 45% in seasonally-adjusted data. A reversal in the macroeconomic outlook, inventory accumulation, higher costs, and concerns about the trajectory of consumer spending all contributed to volatility in orders.