U.S. Macroeconomic Indicators & the Cotton Supply Chain
Following a meeting of Federal Reserve officials last month, Fed Chair Jerome Powell said that U.S. fundamentals were strong and that the economy was “in a good place”. Nonetheless, Federal Reserve forecasts for U.S. GDP growth were lowered, with the projection for 2019 dropping from 2.3% (December forecast) to 2.1%. For 2020, the Federal Reserve is predicting growth will only be 1.9%.
An implication of slower economic growth is that further increases in interest rates become less likely. After steadily increasing rates throughout 2018, expectations are that the central bank will not lift rates in 2019 and that rates might even be lowered to encourage growth. The interest rates that the Federal Reserve controls are influential on other interest rates, and March statements from Federal Reserve officials were followed by decreases in rates on U.S. Treasury notes. A well-publicized effect was that long-term (10-year) Treasury rates fell below short-term (3-month) rates. Historically, when sustained over a period of several months, such inversions have served as a predictor of recession.
All else being equal, stability in U.S. interest rates could support stability in exchange rates. However, global economic conditions generally are not equal over time. A current source of imbalance is the uneven slowdown in growth among major economies. While conditions have weakened in the U.S., greater concern is focused on Europe and China. In the Euro Zone, manufacturing activity contracted at the fastest rate in nearly six years in March. Hit particularly hard was manufacturing in Germany, Europe’s largest economy and exporter. Economic researchers in Germany recently lowered their forecast for German economic growth in 2019 from 1.9% to 0.8%. Slower trade and uncertainty surrounding Brexit are expected to be challenges for all of Europe this year.
China, whose economy has served as an engine for global growth since the financial crisis, is also slowing. The Chinese government’s official growth target for 2019 is a range between 6.0-6.5%. This range is below the 6.6% growth registered in 2018. To stimulate growth, Chinese officials established plans based on tax cuts, infrastructure spending, and easing of residency restrictions. A resolution to the U.S.-China trade dispute could provide another boost. Progress in negotiations has been reported, and rumors suggest a deal may be close (current rumors suggest an agreement could be possible in May). Nonetheless, no official details have been released and it is unknown if/when an agreement might be reached and what a final agreement might entail.
The U.S. economy is estimated to have added 196,000 jobs in March. This represents a significant rebound from February, when job gains were initially reported to have been only 20,000. Revisions to figures to February and January were positive, with the number for February increasing from 20,000 to 33,000 and the number for January increasing from 311,000 to 312,000. The U.S. has added jobs for 102 consecutive months, setting a new record for continuous growth.
The unemployment rate held steady at 3.8%. This is the lowest level since 1969. In addition to job growth, fewer layoffs are helping keep the unemployment rate down. Initial claims for unemployment insurance, a proxy for layoffs, decreased recently from already low levels. Current values are the lowest since 1969. In 1969, the U.S. labor force was only 81 million. It is now 163 million. As a result, as a percentage of the labor force, layoffs are lower than they have ever been.
Average hourly wages increased at 3.2% rate year-over. This marks the sixth consecutive month that wage growth has been over three percent. Historically, three percent wage growth is not strong. However, inflation has also been weak by historic standards. Since December, the U.S. inflation rate has been below the Federal Reserve target of two percent. In February, it was only 1.5%. A widening gap between wage and inflation growth implies higher disposable income, which can support growth in consumer spending.
The Conference Board’s Index of Consumer Confidence decreased 7.3 points to 124.1 in March. Since the fall, monthly changes in the index have become larger (average absolute change since 2017 only 3.7 points). Despite the volatility, values for the index continue to rank among the highest on record (the long-term average near 100).
The latest official figures on consumer spending describe a slowdown in late 2018 and early 2019. Overall consumer spending decreased 0.6% in December and increased only 0.1% month-over-month in January (latest available data). Year over-year, overall spending growth was 2.1% in December and 2.3% in January. Spending on apparel was down 3.2% month-over-month in December and down 0.4% in January. Year-over-year, consumer apparel spending was down 1.3%. A factor contributing to the weakness in annual clothing spending growth is the strong growth one year ago (averaged 3.7% in 2018).
Retail prices for clothing increased 0.4% month-over-month in February (latest available), but were down 1.4% year-over-year. Average import prices for cotton-dominant apparel were unchanged month-over-month in seasonally-adjusted terms from December to January. Year-over-year, average import prices were 2.7% higher.
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