U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview
The Bureau of Economic Analysis estimates the U.S. economy grew at a 2.0% seasonally-adjusted annual rate in the third quarter (Q3 2021). This is lower than the 6.7% growth in Q2 2021 and the 6.3% growth registered in Q1 2021. One reason for the slower overall growth was a slowdown in consumer spending. Consumer spending growth was 1.6% annualized rate in Q3 2021. In Q2 2021, it was 12.0%. In Q1 2021, it was 11.4%.
The slowdown in spending was concentrated on physical goods (as opposed to services). Service spending, which includes outlays for travel and restaurants, was disproportionately affected by COVID. While service spending was lower, consumer spending on goods surged. Slower spending on goods in the third quarter (-9.2%) and higher spending on services (+7.9%) suggests a rebalancing is underway. Despite slower spending on goods overall, spending on clothing remains strong. Year-over-year, growth in spending on apparel was 19.0% higher in the third quarter. Relative to the same period in 2019, consumers spent 25.4% more this year.
A challenge facing retailers is keeping up with consumer demand. Shipping constraints may lead to missed sales during the important holiday sales period. Forecasts from the National Retail Federation suggest that consumers could spend 8.5% to 10.5% more this holiday than last year. Average increases are near 3%. If realized, this year’s growth would represent a record increase.
U.S. apparel imports have been strong in 2021. In terms of weight volume, apparel imports are on pace to reach their highest level since 2010. Imports of home textiles are on pace to set a new record. Nonetheless, the clock is ticking for this year’s holiday, and logistics may prevent retailers from having all the goods they would like to offer to consumers.
When supply lags demand, prices can increase. Despite shipping constraints and increases in fiber prices, both import prices and retail apparel prices are below their levels before COVID. Further increases in import costs can be expected. However, fiber prices represent just a fraction of retail prices, and the influence of other factors can easily outweigh fiber at retail.
Employment
In October, the U.S. economy was estimated to have added +531,000 jobs. Revisions to figures for previous months were positive. The estimate for August rose +117,000 to +483,000. The estimate for September rose +118,000 to +312,000. The 12-month average for job gains is +474,000. Since COVID, there has been a net loss of -4.2 million positions.
The unemployment rate dropped 0.2 percentage points to 4.6%. This is a new post-pandemic low. Before the pandemic, unemployment was 3.5%, which was the lowest level in fifty years. Since the 1970s, unemployment rates below five percent have been rare. After the financial crisis, it took six years for the unemployment rate to fall below that level.
Average wages increased 4.9% in October. Stimulus measures boosted incomes soon after COVID hit the U.S., but apart from other post-COVID months, recent values are the strongest on record (data only go back to 2007). Wages are relevant to discussions surrounding inflation. For inflation to persist, wages need to rise alongside prices. If inflation outpaces wage growth, consumers’ spending power diminishes. In recent months, the overall inflation rate has been as high as 4.4% year-over-year.
Consumer Confidence & Spending
After three months of decline, the Conference Board’s Index of Consumer Confidence increased in October (+4.0 points, to 113.8). The current value is well above the long-term average of 93. The current value is also below the value posted in June (128.9) and below the levels near 130 that were common before the pandemic.
Overall consumer spending increased 0.3% month-over-month in September. Year-over-year, spending was up 6.2%. Apparel spending was up 2.4% month-over-month and up 15.5% year-over-year. COVID distorts comparison against figures from 2020. Relative to September 2019, overall spending was up 4.2%, while spending on apparel was 28.6% higher. The long-term average annual growth rate in spending on clothing is near 2.0%, so recent apparel spending has been extraordinarily strong.
Consumer Prices & Import Data
After five consecutive monthly increases, the CPI for apparel decreased in September. Despite recent increases, average retail prices are still lower than before the pandemic (-3.2% in September 2021 versus February 2020, seasonally-adjusted data). COVID caused retail clothing prices to drop as much as 8.7% year-over-year (May 2020). In September, prices were 3.0% higher year-over-year.
After setting a new record low ($2.95/SME in seasonally-adjusted data) in March 2021, average import prices for cotton-dominant apparel have increased six straight months (seasonally-adjusted data). The current average cost per square meter (SME) is $3.24/SME. This figure is -3.4% lower than before COVID ($3.35/SME in February 2020). The most significant correlation between fiber prices and imports occurs with a nine-month lag, so import prices can be expected to continue to climb.