U.S. Macroeconomic Indicators & the Cotton Supply Chain
As the expansion in the U.S. economy approaches ten-years in age, there are signs that growth may be slowing. A concern repeatedly cited by the International Monetary Fund (IMF) and other global economic forecasters is that deepening trade disputes could reduce economic activity around the world. Although the U.S. threat to raise tariffs on Mexico was lifted, announcements concerning China suggest continued escalation.
On May 10th, the U.S. increased tariffs for a second time on a list of goods from China valued at $200 billion (goods on this list were subjected to a 10-percentage point increase in September, the second increase was another 15 points). This brought the total change in rates on this set of imports to 25 points. Hearings are scheduled to begin on June 17th regarding the administration’s threat to increase tariffs on all imports from China not covered by previous increases. If eventually implemented, this would include imports falling under HS Chapters 61 (Knit Apparel), 62 (Woven Apparel), and 63 (Other Made-Up Textile Articles, covering most home textiles like bedding and towels).
The U.S. threatened to increase tariffs on all imports from Mexico if Mexico did not cooperate with the president’s request for further assistance to stem the flow of migrants to the southern border. A last-minute agreement prevented the duties from going into effect (the initial 5 point increase was threatened to go into effect June 10, further 5 point increases were threatened on July 10, September 10, and October 10). Simultaneous to the issuance and resolution of these threats is the ratification process for the recently negotiated U.S.-Mexico-Canada Agreement (or USMA, which was designed to update NAFTA).
As more consumer goods are (possibly) subjected to higher tariffs, consumer prices could be expected to rise. Higher consumer prices can lead to lower consumer demand, and therefore to smaller retailer orders. Correspondingly, with the tariff threats, fears related to a slowdown in demand were the likely drivers of volatility in a range of financial markets (including the latest decreases in cotton prices). While the tariff disputes have primarily been bilateral (e.g., U.S.-China), spillover effects could be global. For example, if China manufactures less because of a slowdown in U.S. import demand, China will place fewer orders for raw materials. Such a deceleration in Chinese demand could spread to other countries that supply China with raw materials and therefore become a headwind for economic growth globally.
Due to concerns of slower economic growth, Federal Reserve officials have already made statements indicating their willingness to lower interest rates. A decrease in U.S. interest rates could support financial markets but could also introduce volatility in exchange rates. If the Federal Reserve does lower rates, it will mark a significant reversal relative to 2018, when rates were increased four times.
The U.S. economy is estimated to have added 75,000 jobs in May. This represents a strong decrease relative to last month. With revisions, job growth in March is currently estimated to have been +153,000 (down from last month’s estimate of +189,000) and job growth in April is currently estimated to be +224,000 (revised down from last month’s estimate of +263,000). The average over the past twelve months is now 196,000. Over the same period one year ago, the average was 203,000. This is the first time in 2019 that the 12-month average for job growth fell below the average from a year ago.
The unemployment rate held at 3.6%, representing the lowest rate since December 1969. Average wages rose 3.1% year-over-year in May. The is the eighth consecutive month that wages have increased by more than three percent. Nonetheless, wage growth in May was lower in May and represented the lowest rate of annual growth since September.
The Conference Board’s Index of Consumer Confidence increased around five points for the second consecutive month. The latest reading of 134.1 is the highest since November and is close to the all-time record (144.7, set in January 2000). The survey that is the basis for the index was completed May 16th, before the president’s announcement regarding potential tariff increases on goods from Mexico.
Overall consumer spending was flat month-over-month but increased 2.7% year-over-year in April. After rising 3.7% month-over-month in March, consumer spending on apparel increased an additional 0.9% in April and was up 5.7% year-over-year. This is the strongest rate of annual growth for apparel spending since last summer (was 5.8% in July and 6.2% in August).
Retail apparel prices decreased 0.5% month-over-month in April. Year-over year, consumer prices were 3.2% lower. This is the biggest year-over-year decrease since 2003, when the U.S. was opening itself up to apparel imports from China. Average import prices for cotton-dominant apparel were up 0.6% month-over-month (seasonally-adjusted) and up 3.8% year-over-year in April (latest available data).
In volume terms, apparel imports from China were down sharply year-over-year in March (-13% apparel of all fibers). Despite the size of the decrease, the drop appears to be a result of seasonal factors. March and April are the months with the lowest import volume, and this can cause volatility in measures of change during these months. When averaged over the first four months of the year, U.S. imports from China actually increased slightly (+1.9%). Nonetheless, China’s share of U.S. imports Jan-Apr decreased somewhat (35.9% in 2018, 34.8% in 2019). Spring months (Feb-May) are the lowest for Chinese share, it peaks Aug-Oct and averaged 48% during this time in 2018.
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