U.S. Macroeconomic Indicators & the Cotton Supply Chain
Before Russia invaded Ukraine, inflation was already a creeping global concern. The outbreak of war in Europe caused extreme volatility in commodity markets, most notably those tied to energy and food markets. The national average for U.S. gasoline prices increased by a full dollar per gallon between mid-January and mid-March. Year-over-year, recent gas prices are 47% higher. U.S. food prices were up 8% year-over-year in February (the latest month with data available), the strongest rate of increase since the early 1980s.
Despite the challenges rising prices pose for consumers, the economy came into this situation with momentum. The recovery in the labor market has been nearly complete. After being down by more than ten million workers at its lowest point, the size of the U.S. labor force is now virtually even with its pre-pandemic level. The economy continues to add jobs, and there is about twice the number of unfilled job openings as there are unemployed workers. Wages have been rising at the fastest rate in at least fifteen years. Significantly higher rates of income were saved and accumulated during the pandemic. While recent gains in housing prices are hitting those looking to buy, the increase in home values boosted homeowner wealth alongside the surging stock market.
Due to the volume of money created and historically low levels of interest rates, the Federal Reserve may have lacked tools to combat another demand-driven economic crisis (such as the one that followed the financial crisis). However, the current situation is supply-related. Consumers have been looking for more goods at the same time the world is suffering from a shipping crisis. Businesses are having difficulty finding the workers they need. These sources of scarcity contribute to higher prices.
Since the monetary policy has been heavily expansionary, the central bank has does not lack tools to combat inflation. It has already enacted one interest rate increase and has plans to scale back its asset purchases (money creation). A handful of additional rate hikes are expected this year. The timing and magnitude of policy changes need to be balanced to keep the economy from recession.
In March, the U.S. was estimated to have added 431,000 jobs. Revisions to existing figures for January (+23,000 to +504,000) and February (+72,000 to +750,000) indicated nearly 100,000 more jobs were created over the past two months than previously estimated. The average growth in payrolls over the past twelve months is +541,000. The net change in jobs since the onset of COVID is -1.6 million positions.
With job growth, the unemployment rate fell to 3.6% in March. This is virtually even with values before the pandemic (3.5%). It is rare for unemployment in the U.S. to drop below five percent, so these values reflect an exceptionally tight labor market. A factor contributing to difficulty finding employees in recent years was that fewer people wanted to work after COVID. Twelve million fewer people wanted to work at the lowest point after the virus. The labor force has been recovering, and it is now nearly even with the level before the pandemic (164.6 million people in February 2020, 164.4 million in March 2022).
Tightness in the labor market has helped workers negotiate higher wages. Year-over-year growth in wages has been erratic due to the influences of stimulus over the past couple of years, but it appears to have been stabilizing at a level above five percent (was +5.6% in March). Apart from the values most affected by stimulus with COVID, current readings are the highest on record (data only back to 2007) and are more than double the average between the last two recessions (+2.4% between June 2009 and February 2020). Higher wages can help consumers cope with rising prices. However, wage growth is also a contributing factor to inflationary spirals, increasing costs for employers that then have to be passed on to consumers.
Consumer Confidence & Spending
Despite the outbreak of war in Europe, the Conference Board’s Index of Consumer Confidence increased by +1.5 points in March (from 105.7 in February to 107.2). The reading in February was the lowest value in one year. The value in March is below the recent peaks posted last summer (was 128.9 in June 2021), but it is also above the COVID-driven lows near 85 that were reached in the spring of 2020. Before the pandemic, the Index of Consumer Confidence was near 130.
After a strong month-over-month increase in January (+2.1%), overall consumer spending decreased by -0.4% in February. Year-over-year, overall spending was +4.6% higher in February. Spending on apparel followed a similar pattern. In February, clothing expenditures rose +7.6% month-over-month, which is very large by historical standards. The average monthly increase in the ten years before the pandemic was +0.2%. Year-over-year, apparel spending was up +15.5% higher in February. Relative to the same month in 2019, spending was 21.8% higher.
Consumer Prices & Import Data
The CPI for apparel increased for the fifth consecutive month in February. Year-over-year average clothing prices were 6.4% higher. The current reading is even with values from the summer and fall of 2019. Average import prices per square meter (SME) of cotton-dominant apparel increased 1.3% month-over-month in February (seasonally adjusted data) and were 14.4% higher year-over-year. Relative to levels before COVID, average import costs were 3.3% higher.