U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview
Global financial markets continued to be volatile over the past month. Volatility likely stems from uncertainty regarding how the global economy will manage the transition from a heavily stimulated recovery into one grappling with inflation, supply shortages, and tightening monetary policies.
The outbreak of war in Europe added another set of variables into the mix of influences causing uncertainty. For countries outside of Ukraine and Russia, reductions in the availability of energy and agricultural commodities are among the largest impacts of the war. The constraints of supply have been reflected in commodity prices. One of the commodities most affected has been oil. The sanctions imposed on Russia were recently expanded to include sea-bound shipments to the European Union (E.U.). Oil is not homogeneous, and it is unclear where the E.U. might be able to find the replacement supplies necessary to support its economy, but the scramble to secure shipments should support prices globally.
In the U.S., gasoline prices reached new record highs in June (nominal terms). The labor market remains strong, and wage growth has held above five percent. Nonetheless, there is evidence that consumers are starting to feel the pinch of rising prices. The savings rate, which had been over ten percent during much of the post-COVID period (from March 2020 through July 2021), has since eroded. The latest value (April 2022) was 4.4%, the lowest reading since 2008.
Higher wages and savings accumulated during the pandemic may help sustain U.S. consumer spending for several months. However, if prices for necessities like food and energy continue to rise, consumers may pull back on more discretionary purchases, including clothing. U.S. apparel import volumes have been strong in recent months, and a downturn in consumer demand could imply a buildup of inventory among clothing retailers. One major U.S. retailer has already warned that a reduction in consumer demand pushed inventories up much faster than projected. The struggle to refill pipelines after COVID and with the shipping crisis may have led retailers to overcompensate in order volume. If inventories build in the U.S. and other locations struggling with inflation, retailers could pursue strategies in the other direction, and orders could slow throughout supply chains.
Employment
The U.S. economy was estimated to have added +390,000 jobs in May. Revisions to previous months were mixed. The figure for March decreased -30,000 positions to +398,000. The figure for April increased +8,000 to +436,000. The twelve-month average for job growth is now +545,000. The unemployment rate was unchanged at 3.6%, which is where it has been since March. This value is near historic lows and is virtually even with the level before COVID.
Wages were +5.2% higher year-over-year in May. Following the release of COVID-related stimulus, wage growth has generally been above five percent. Between the financial crisis and the onset of COVID, wage growth peaked at +3.5%. Overall inflation has been above eight percent in the last two months of data (March and April). Between the financial crisis and the onset of COVID, inflation was generally below three percent.
Consumer Confidence & Spending
The Conference Board’s Index of Consumer Confidence decreased slightly month-over-month in May (-2.2 points to 106.4). The index has been holding to levels between 105 and 115 since September 2021. In June 2021, the index climbed to 128.9. The value in June was the highest since COVID and was virtually even with the levels near 130 that were common before the pandemic. The lowest value since the virus was 87.1 (December 2020 and January 2021). During the financial crisis, the Index of Consumer Confidence fell as low as 25.3 (February 2009).
Overall consumer spending increased +0.7% month-over-month in April, up +2.8% year-over-year. Spending on garments increased +1.8% month-over-month and was up +1.4% year-over-year. In the past couple of months, annual rates of change in spending are returning to more normal values after the distortive effects of the shock of COVID-driven shutdowns and the surge in spending on goods that followed.
Consumer Prices & Import Data
The CPI for apparel decreased -0.6% in March. This was the first month-over-month decrease in six months. Year-over-year retail clothing prices were up +5.6% in March. Despite the string of recent increases, average retail prices for clothing remain close to levels before COVID (average of 117.7 from 2018-19, the current value is 117.6).
Sourcing costs continue to rise. The latest seasonally-adjusted cost per square meter equivalent (SME) of cotton-dominant apparel was the highest since 2013. The latest value is $3.51/SME (April), representing an +18% increase above the record low of $2.96/SME set in March 2021. Following the 2010/11 spike in cotton prices (when monthly averages for the A Index climbed as high as 230 cents/lb, the A Index averaged 164 cents/lb in May 2022), the average cost per SME peaked at $3.79/SME.