U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview
The Bureau of Economic Analysis released its first estimate for U.S. GDP growth in the first quarter. The 4.8% contraction (seasonally-adjusted annual rate) is the biggest drop since the 8.4% decrease in the fourth quarter of 2008. Most state-level shutdowns in the U.S. went into effect around the middle of March. This means that only a couple weeks of the nearly complete national shutdown were covered by the first quarter. This also means that figures for the second quarter can be expected to be much worse. The Euro Zone, where the virus became widespread a little earlier than the U.S., reported at 14% contraction in the first quarter.
The labor market is experiencing its worst shock on record. Since mid-March, initial claims for unemployment insurance have totaled 33.5 million. For context, the U.S. labor force was 165 million before COVID-19. An effect has been that the unemployment rate whipsawed from the lowest level in 50 years (near 3.5% from September 2019 to February 2020) to the highest on record (data back to 1948) within only two months. With so many consumers out of work and with uncertainty around surrounding income, consumer spending has been under pressure. In March, overall spending was down 5% year-over-year. Spending on apparel was down 28%. Among all spending categories for goods (as opposed to services), clothing suffered the largest year-over-year decline.
The pullback in consumer spending on clothing has meant that apparel retailer revenue has evaporated. Meanwhile, costs associated with floor space, marketing, and general operations continue to accumulate. In efforts to stave off bankruptcy, cost-cutting has been widespread. Order cancelations have been making headlines for more than a month. Major retailers have also gained attention for delays in rent payments. Others have already been pushed into bankruptcy negotiations.
The latest import data are for March. In March, apparel import volume was down 13% year-over-year (square meter equivalence, apparel of all fibers). Given that the full effects of the virus did not begin to be felt until the end of March, and that imports tend to have a lagged response to changes in market conditions, later decreases can be expected to be much more significant. Meanwhile, season-specific shipments that have arrived are missing their window for sales. It may be possible to warehouse some of these items for next year, but that involves costs and the risk of being out of style. Another option is discounting, but with consumers still under social distancing mandates, it may still be difficult to move goods. All implies further strain on retailer finances.
In parallel, manufacturers are also facing a cash crunch. Canceled retailer orders mean less revenue. Meanwhile, the rapid onset of the crisis means that orders for raw materials can still be arriving. These arrivals imply costs, and with limited revenue, costs threaten insolvency. As manufacturers cut costs and cancel upstream orders, fiber demand will be affected. The USDA made a record cut to its cotton consumption forecast last month. Another cut can be expected in their May set of estimates.
China, which was the first country to suffer from COVID-19, and was also the first to remove itself from a general shutdown. As a result, China may provide some guidance for the rest of the world in terms of what can be expected of consumers after shutdown orders are lifted. Unfortunately, the latest Chinese retail sales data have been describing year-over-year declines. In both March and April, Chinese sales were down 20% year-over-year. This contrasts with year-over-year growth rates near 10% before the shutdown.
Employment
The U.S. economy is estimated to have lost a record 20.5 million jobs in April (the payroll figures used for net job losses/gains are derived from surveys of companies, initial claims for unemployment insurance come from states and describe job losses). For comparison, the worst month of the 2008-09 financial crisis resulted in a net lost of 800,000 jobs. The unemployment rate increased from 4.4% in March to a record 14.7% in April. Initial claims for employment insurance were 3.2 million in weekending May 2nd. This is below the recent peak over six million but remains far above anything witnessed historically (pre-COVID-19 record was 695,000).
Consumer Confidence & Spending
The Conference Board’s Index of Consumer Confidence suffered a record monthly decrease in April. Month-over-month, the decline was 31.9 points, lowering the index from 118.8 to 86.9. The current value is the lowest since 2014. Overall consumer spending fell 7.3% month-over-month and 5.0% year-over-year. Spending on clothing was down 29% month-over-month and 28% lower year-over-year.
Consumer Prices & Import Data
The CPI for garments was decreased 1.8% month-over-month and was down 2.0% year-over-year. The average import cost per square meter (SME) of cotton-dominant apparel was 7.1% lower month-over-month seasonally adjusted) and was 6.3% lower year-over-year. Apparel import volumes have been affected by tariff increases on Chinese-made clothing since September. From September to February, the volume of U.S. cotton-dominant apparel imports from all sources fell 9.5% year-over-year (was -12.8% for apparel of all fibers). In March, cotton-dominant volumes were down 10.0% (-10.3% for apparel of all fibers).