U.S. Macroeconomic Indicators & the Cotton Supply Chain
The list of challenges facing apparel sourcing professionals seems only to get longer. First, there were trade tensions and tariff increases. Then the worst pandemic in a century hit. More recently, there have been spiraling shipping delays and cost increases. Additions made in the last month include rolling power outages in China and a sharp acceleration in cotton prices.
Unfortunately, this string of supply-related issues has coincided with robust demand growth, meaning that opportunities to provide and sell to consumers may be missed. Year-over-year comparisons are still somewhat affected by the COVID-driven downturn one year ago. Relative to 2019, consumer spending on apparel has averaged increases of 25% levels over the past six months. The five-year average rate of annual growth in clothing spending is 2.1%, so growth has been far beyond normal.
When demand outstrips supply, prices tend to escalate. Despite five months of consecutive increases, the latest reading for the CPI for garments is -1.6% below the levels posted before the pandemic hit the U.S. (percentage change August 2021 versus February 2020). The average import cost per square meter of apparel (cost of goods, excluding shipping and tariffs) set a new record low in March 2021. It has since moved higher, but the latest reading (August) is still -4.5% lower than in February 2020 (pre-COVID).
Further upstream, prices have been surging. Even though global supply and demand estimates do not suggest a shortage of upland cotton, prices have been following momentum higher. Current prices for NY/ICE cotton futures (Oct 11th) are over 110 cents/lb. Near the middle of September, prices were testing levels below 90 cents. Yarn prices have been increasing alongside fiber prices. In monthly averages, both fiber and yarn prices are more than 30% higher than in February 2020.
The disconnect between rising fiber and yarn prices and weak import costs suggests some financial pain in the middle of the supply chain. That pain could reflect the lag between the time when contracts were signed and when apparel is delivered. One year ago, there were serious questions about the direction of economic growth with COVID-driven shutdowns a feature of many markets. That negotiating environment, with fewer orders for manufacturers, could have been favorable for retailers. Since then, the negotiating equation has likely flipped towards manufacturers, with retailers striving to get orders completed and shipped.
In September, the U.S. economy was estimated to have added +194,000 jobs. Revisions to figures for previous
months were positive, with the estimate for July rising +38,000 to +1.1 million and the estimate for August rising +131,000 to +366,000. The 12-month average for job gains is +474,000. Since COVID, there has been a net loss of -5.0 million positions.
The unemployment rate dropped 0.4 percentage points to 4.8%. This is a new post-pandemic low. Initial claims for unemployment insurance continue to trend lower. Average wages increased 4.6% in September. Between the financial crisis and before COVID, annual wage growth peaked near 3.5%. During that time, however, inflation was lower. Wage growth will need to outpace inflation for real consumer spending growth to remain strong. Year-over-year comparison against figures from 2020 can be a distortion, but the overall inflation rate was 5.2% in August.
Consumer Confidence & Spending
The Conference Board’s Index of Consumer Confidence decreased for the third consecutive month in September. After the 5.9 point month-over-month drop, the current reading for the index is 109.3. This is above the long-term average of 93. It is also well below the value of 128.9 posted in June and well below the levels near 130 that were common before the pandemic.
Overall consumer spending increased 0.4% month-over-month in August. Year-over-year, spending was up 7.0%. Apparel spending was up 2.0% month-over-month and up 20.9% year-over-year. Relative to August 2019, overall spending was up 3.7%, while spending on apparel was 24.8% higher. Spending on services has been a drag on overall spending, while consumers continue to demonstrate an appetite for goods like clothing.
Consumer Prices & Import Data
The CPI for apparel increased for the fifth consecutive month in August. Despite the string of increases, average retail prices are still -1.6% lower than before the pandemic (August 2021 versus February 2020).
After setting a new record ($2.95/SME in seasonally-adjusted data) in March 2021, the average cost per square meter (SME) of cotton-dominant apparel imports has increased for the past five months. The latest value, however, remains -4.5% lower than it was before COVID. Rising fiber prices and competition for capacity may eventually pull import prices above pre-COVID levels.