U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview
The Omicron variant has driven COVID case counts to new records in the U.S. and elsewhere. While the new strain has proven extraordinarily contagious, it has also been less dangerous to human health. A hope for the longer term is that widespread infection caused by omicron could boost collective immunity at a lower relative cost in terms of hospitalizations and deaths.
Wage growth was a little slower in December (+4.7% year-over-year, it was over five percent in September and October). However, the rate of income growth is still more than a full percentage point higher than the peak observed between the financial crisis and the COVID pandemic. While recent gains in wage growth can support increased consumer spending, a concern is that it may also contribute to inflation by raising costs for suppliers of goods and services.
Retail apparel prices have risen in recent months but have yet to rise beyond pre-COVID levels (the November apparel CPI was 1.7% lower than in February 2020). Average import costs recently equaled their pre-pandemic levels. Yarn and fiber prices have flown by values before the outbreak (the average for the A Index was up 65% in December 2021 versus February 2020, the average for Cotlook’s yarn index was up 45% over the same period).
Statistically, the strongest correlations between fiber prices and apparel import costs are around nine months. This suggests that the surge in cotton prices that began in late September should continue to pull import costs higher for another five to six months. Higher sourcing costs could eventually lift retail prices beyond pre-pandemic levels.
The year-over-year rate of overall inflation was 6.9% in November (the latest month with data). This was above the rate of wage growth that month (5.1%), implying a decrease in consumers’ spending power. After considering inflation to have been a “transitory” threat a few months ago, it has emerged as a concern for the Federal Reserve. Monthly additions to the money supply are scheduled to wind down, and a series of increases in interest rates are expected this year. These efforts could eventually contain inflation. However, a side effect of tightening monetary policy can be slower economic growth.
Employment
In December, the U.S. economy was estimated to have added +199,000 jobs. Revisions to figures for previous months were positive. The estimate for October rose +102,000 to +648,000. The estimate for November rose +39,000 to +249,000. The 12-month average for job gains is +537,000. Since COVID, there has been a net loss of -3.5 million workers.
The unemployment rate dropped 0.3 percentage points to 3.9%. It has been rare that the U.S. unemployment rate has held at levels this low. Since records began being kept by the Bureau of Labor Statistics in the late 1940s, there have been only four or five other periods when the unemployment rate was sustained below four percent.
Consumer Confidence & Spending
The Conference Board’s Index of Consumer Confidence increased in December, rising 3.9 points relative to November to 115.8. The current value is the highest in five months (it was 125.1 in July 2021), and it is well above the value one year ago (87.1 in December 2020). Nonetheless, the current figure is below the values near 130 that were reached before COVID and in the summer of 2020 (when case counts set post-pandemic lows). The long-term average (since 1970) is near 93.5.
Overall consumer spending was essentially flat month-over-month in November (+0.03%). Year-over-year, overall spending was up 7.4%. Apparel spending was down month-over-month in November (-2.6%). This was the first month-over-month decrease in three months (was -2.7% in July and averaged 1.6% month-over-month growth from August through October). Year-over-year, apparel spending was 18.0% higher in November. Relative to the same month in 2019 (pre-COVID), apparel spending was up 22.9%. The long-term average annual growth rate in spending on clothing is 2.2% (2003 through 2019), so recent growth in apparel spending is exceptional.
Consumer Price & Import Data
The CPI for apparel increased in November (latest available). Month-over-month, retail prices were 1.5% higher. Year-over-year, prices were 5.0% higher. Despite monthly increases in seven of the past eight months, average retail prices are still lower than before the pandemic (-1.7% in November 2021 versus February 2020, seasonally-adjusted data).
Average monthly prices per square meter equivalent have increased for eight straight months (seasonally-adjusted data). Nine months ago, average import costs set a record low ($2.95 per square meter equivalent or SME in March 2021). In November, the latest month with import data available, the average cost per SME was $3.43/SME. The latest value was $0.15/SME (+4.7%) higher month-over-month and was 13.1% higher year-over-year. After being below pre-COVID levels since the spring of 2020, the current cost per cotton-dominant SME is now on par with levels before the pandemic.