U.S. Macroeconomic Indicators & the Cotton Supply Chain
Since the trade dispute began to escalate in the first half of 2018, there has been an ebb and flow in optimism regarding the potential for a resolution. Although some concessions have been made (a postponement of increases scheduled to go into effect December 15th is possible), the optimism that emerged after talks in early October appears to have faded with the cancelation of the APEC summit (Asia-Pacific Economic Cooperation), where a “phase one” deal was expected to have been signed-in mid-November. Since then, both sides have made conflicting comments regarding what a possible deal could contain.
U.S. officials stated that China would import $40-50 billion of U.S. agricultural goods. This represents a near doubling of the previous record. China has purchased more U.S. soybeans recently, and there have been reports of waived tariff penalties for certain agricultural commodities. However, Chinese officials have generally shied away from numerical commitments. Chinese comments specific to cotton suggest that Chinese mills already have enough supply and that a significant increase in purchases may not be forthcoming. Meanwhile, from the Chinese side, officials stated that tariffs would be eliminated as part of an initial deal. U.S. officials countered those statements and insisted that at least some tariffs would be maintained in an initial agreement.
The back-and-forth with each side saying what they want and the other side indicating they will not get it suggests that there is some distance between the two parties. Recent statements from the U.S., including remarks stating that tariffs could remain in place beyond the 2020 election, provide an additional reason to believe that the deal that seemed close to completion in early October has become more distant. The longer that the trade dispute continues, the deeper its disruption to supply chains.
The tariffs on apparel that went into effect in September have already dampened demand for imports not only from China but for U.S. apparel import demand in aggregate. When expanded across industries, the negative influence on global growth becomes apparent. The recently announced expansion of U.S. tariffs beyond China, to Argentina, Brazil, and possibly the E.U., should also not be expected to be helpful for global growth.
In the U.S., the widely followed Institute for Supply Management’s (ISM) purchaser manager index (PMI) for manufacturing signaled contraction for the fourth consecutive month in November. The manufacturing sector can serve as a leading economic indicator for overall economic activity. Thus far, the U.S. economy has been supported by consumer spending. Consumer spending has been buoyed by a strong labor market, and consumer confidence has been holding to high levels.
Over the Thanksgiving weekend, which traditionally marks that start to the important holiday sales period, the National Retail Federation (NRF, a trade group representing U.S. retailers) estimates that U.S. consumers spent 16% more than one year ago. The NRF forecasts spending growth over the entire holiday shopping period will increase by about 4% this year. Last year, holiday spending growth was 2.1%. In 2017, growth was 5.2%. In 2015 and 2016, growth was near 3.2%.
The U.S. added 266,000 jobs in November. This was the largest monthly increase since January. Revisions to figures for September (+13,000 to +193,000) and October (+28,000 to +156,000) were both positive. Over the past twelve months, the average monthly increase has been 184,000. During the same period last year, job gains averaged 219,000.
The unemployment rate declined slightly, dropping from 3.6% to 3.5%. The unemployment rate has been hovering near this level since April. This level is the lowest since the late 1960s. Wage growth was 3.1.%.
The Conference Board’s Index of Consumer Confidence decreased for the fourth consecutive month in November. The latest decline was marginal month-over-month (-0.6, to 125.5), and despite several months of successively lower readings, the latest value is still high relative to the long-term average near 100.
Overall consumer spending increased by 0.1% month-over-month in October and was 2.3% higher year-over-year. Spending on apparel increased at the strongest monthly rate since March, rising 2.3% month-over-month. Year-over-year, apparel spending was 4.0% higher.
Lower apparel prices may have encouraged spending. The CPI for garments decreased by 2.1% month-over-month in October and was 3.3% lower year-over-year. The average cost per square meter of imported cotton-dominant apparel decreased by 0.2% month-over-month in October and was 2.7% lower year-over-year.
Further evidence of the negative effects of the trade dispute surfaced in the latest apparel import data, with both overall imports and imports from China falling sharply. In October, total U.S. apparel imports were down 16% year-over-year in volume terms (square-meter-equivalence). Imports from China were down 30%. This followed reductions of 4% (all sources) and 13% (China) in September. From January through August, cumulative shipments from all locations were up 5% and shipments from China were up 4%.
The larger reduction in shipments from China relative to the rest of the world resulted in an erosion of Chinese share (seasonally-adjusted Chinese share was 35% in October, it averaged 41% the first eight months of the year). While import data indicate that China is losing business due to tariffs, it is also notable that other markets have not been able to completely offset those declines, and a net result has been a reduction in U.S. apparel demand.
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