U.S. Macroeconomic Indicators & the Cotton Supply Chain
The U.S. economy defied expectations of a recession in 2023. Instead, growth proved not only resilient but robust, especially in the second half of the year. The latest estimates indicate real U.S. GDP expanded at a +4.8% rate in the third quarter and a +3.3% rate in the fourth quarter. In annual data, the U.S. economy is estimated to have grown +2.3% in 2023, representing an acceleration from the +1.9% rate posted in 2022.
The reason for widespread expectations of a recession was the sharp rise in interest rates that began in March 2022. From levels near zero, the Federal Reserve lifted their rates to the current effective values between 5.25% and 5.50%. Other recent recessions were preceded by smaller increases (e.g., rates increased four percentage points ahead of the financial crisis and rates increased only a point and a half ahead of the dot-com crash).
In 2024, it is expected that the Federal Reserve will lower interest rates. A halt to rate increases is a positive for growth because the headwind will stop getting stronger. However, while less pressure on the economic brakes will be helpful, rates are not expected to drop to levels that could be considered stimulative.
To explain, there is a concept referred to as the neutral interest rate. Above that level, interest rates are considered to slow growth. Below that level, rates are considered to stimulate growth. A task for officials at the Federal Reserve is to estimate where that neutral rate might be and then set rates at levels to meet policy objectives (e.g., tame inflation). Recent estimates from members of the Open Market Committee (the group within the central bank that makes interest rate decisions) suggest the neutral rate is near 2.5%. If that is a reasonable estimate, and if the central bank lowers interest rates to forecasted levels near 4.5%, rates will still be well above the neutral value. This implies that the economic brakes will still be on, just that they will not be pushed down quite as hard.
While interest rates may remain a (slightly weaker) headwind for growth, there are also tailwinds. The labor market, in particular, has proven strong. Unemployment continues to hold below four percent, which is a level only rarely experienced in modern U.S. history. The tight job market has supported wages. Since May 2023, wage growth has outpaced the rate of inflation, which implies greater spending power. Consumer confidence has been moving higher, and improved spending power paired with rising confidence can support consumer spending.
As a result, there is a swirl of economic influences in the new year. Interest rates can be expected to remain a drag, even if they shift a little lower. Meanwhile, the labor market and consumer spending can be expected to contribute to economic growth. The International Monetary Fund (IMF) released an updated set of forecasts for economies around the world at the end of January. Its estimate for U.S. growth in 2023 is 2.5%, and the projections for 2024 and 2025 are 2.1% and 1.7%. Global growth is estimated at 3.1% in 2023, and projections for the world in 2024 and 2025 are 3.1% and 3.2%.
The U.S. economy is estimated to have added +353,000 new jobs in January. Revisions to previous months were positive, with the figure for November rising +9,000 to +182,000 and the figure for December rising +117,000 to +333,000. The current twelve-month average is +225,000.
The unemployment rate was unchanged month-over-month at 3.7% and remains at a historically low level. Wages increased +4.5% year-over-year in January. Wage growth has been trending downward since the post-stimulus peak of +5.9% was recorded in March 2022. However, last month, wage growth accelerated slightly and reached the highest annual rate since September.
Consumer Confidence & Spending
The Conference Board’s Index of Consumer Confidence increased sharply for a second consecutive month in January, rising +6.8 points to 114.8. This followed a +7.0 point gain in December. The current value is the highest since the second half of 2021. The Conference Board attributed the improvement in attitudes to slower inflation, expected decreases in interest rates, and a persistently strong labor market.
In inflation-adjusted terms, overall consumer spending increased +0.5% month-over-month in December. Year-over-year, overall spending was +3.2% higher. This was the strongest annual rate of increase since early 2022, when stimulus and recovery from COVID were driving growth. After increasing rapidly in November (+2.0%), consumer spending on apparel built further on those gains in December (+1.6) Year-over-year, spending on clothing was +2.2% in November and +3.4% in December. The increases contrasted with the year-over-year decreases registered each month between March to December 2023.
Consumer Prices & Import Data
Following a significant -1.5% month-over-month decrease in November, the CPI for garments increased +0.2% in December. Year-over-year, retail apparel prices were +1.1% higher, which represents the lowest annual rate of price increase since prices began to recover after COVID.