U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview
In recent comments, the Federal Reserve reiterated that it is willing to continue to increase interest rates until the threat of inflation has definitively eased. The latest comments from the Fed’s chairman made in late August, were followed by losses in several markets, including cotton.
Several spending categories have already experienced price decreases. Notably, U.S. gasoline prices have been declining since June. The most recent national average was $3.86/gallon, down from the peak of $5.11/gallon in the middle of June. The rate of year-over-year increases in U.S. clothing prices has slowed from rates near seven percent to those below five percent. Despite year-over-year gains, price levels for apparel have not moved too far beyond values before COVID (July 2022 CPI was +1.8% versus the average from 2019).
The labor market can influence inflation. While the latest job numbers described a deceleration in hiring in August, but jobs are still being added at a rate above the long-term average and the job market is tight. Tightness in the labor supply can support wage growth. As wages rise, businesses may need to pass along the cost increases to consumers. Higher wages can also help reduce the difficulty in securing staff by pulling more workers into the economy. The Federal Reserve has a dual mandate of supporting employment and managing inflation. Both objectives require careful balancing as interest rates rise and the economy slows.
Employment
The U.S. economy was estimated to have added +315,000 jobs in August. Revisions to previous months were negative (figure for June reduced -105,000 to +293,000, July reduced -2,000 to +526,000). The twelve-month average for job gains is +487,000.
The unemployment rate increased marginally, from 3.5% to 3.7%. This was primarily due to a substantial month-over-month increase in the labor force (+786,000 workers in August versus July). Relative one year ago, +2.6 million more people were in the labor force and +5.5 million more people were working in August. The larger increase in workers relative to the labor force over the past year implied a tightening in the labor market (the unemployment rate fell from 5.2% to 3.7% year-over-year).
Tightness in the labor market has been supportive of wage growth. Wages were up 5.2% year-over-year in August, nearly even with the average over the past 12 months (5.3%) and well above the peak rate of increase between the financial crisis and the onset of the pandemic (3.6% in February 2019).
Consumer Confidence & Spending
The Conference Board’s Index of Consumer Confidence increased for the first time in three months in August (+7.9 points month-over-month, from 95.3 to 103.2). The current value matches the level in May. Since COVID, the index has been between 87.1 (February 2021) and 128.9 (June 2021). The long-term average is 93.8 (since 1970).
In July, overall consumer spending increased +0.2% month-over-month in inflation-adjusted terms. Year-over-year, real spending was +2.2% higher. Spending on garments rose +0.7% month-over-month and was up +2.1% year-over-year. Relative to the same month in 2019 (pre-COVID), spending on apparel was +25.1% higher. Over the long term, the average annual growth in consumer spending on clothing is close to two percent. In the 26 months since the COVID-driven shutdown (June 2020-July 2022), spending growth on apparel outpaced overall spending in each of the first 21 months. For the past five months, spending growth on apparel was lower than growth in overall spending.
This suggests a rebalancing as consumers shift away from spending on goods and towards services. Spending in 2019 averaged 36% for goods and 64% for services. Following the pandemic, the share of spending on goods climbed as high as 42% (58% on services) in the spring of 2021. The latest proportions are 39% for goods and 61% for services (July 2022). At the same time, consumers are rebalancing spending between goods and services; they are grappling with inflation for necessities such as housing (up 7% year-over-year in CPI data for July), food (up 11% year-over-year), and utilities (up 17% year-over-year).
Consumer Prices & Import Data
The CPI for apparel decreased -0.1% in July. Year-over-year, retail clothing prices were +4.7% higher. This is down from the peak year-over-year rate of +6.9% in March 2022. The latest value for the CPI for apparel is +1.8% higher than the average in 2019.
Import volumes have been strong, with recent seasonally-adjusted annual rates 35% higher than they were before COVID (weight volume of apparel of all fibers imported in the U.S., past three months versus the average for 2019). Import costs continue to rise. In July, the average import cost per square meter (SME) of cotton-dominant apparel was up +23% year-over-year, reaching the highest value since 1990. The influx of imports followed the rise in inflationary pressure at the consumer level. Any pullback in consumer spending resulting from inflation could contribute to inventory accumulation and discounting.