U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview
The outlook for the U.S. economy remains clouded by uncertainty. Arguments suggesting a slowdown find support from persistent inflation and the steepest increases in interest rates in a generation. Arguments suggesting continued growth find support from a strong labor market and a resilient consumer.
A recent positive for the economy is that the political standoff regarding the debt ceiling found a resolution. This removed a source of uncertainty weighing on financial markets. Other challenges experienced over the past several months included the spate of bank failures throughout the spring and an uptick in companies declaring bankruptcy. Meanwhile, in May, the number of new jobs was the highest since February. May’s job growth matched the average over the past twelve months, which indicates that recent job growth has been stable rather than trending lower.
Alongside other decision-makers attempting to navigate these economic cross currents, the Federal Reserve is attempting to fulfill its dual mandates of maintaining price stability while facilitating the maximum level of sustainable employment. The labor market remains tight, with the unemployment rate holding below four percent for more than a year. Although layoffs have been rising, the strength of the labor market suggests the employment-related mandate may be in a good enough position to allow the central bank to continue pushing higher interest rates to control inflation.
The latest inflation readings (April) indicate aggregate prices were more than four percent higher than one year ago. This is more than double the two percent target rate maintained by the central bank. It is generally expected that the Federal Reserve will pause rate increases at its meeting in June. However, with inflation well above the target rate, it is generally believed that it is too early for the Federal Reserve to stop increasing rates and that rate hikes will resume later this year.
Employment
The U.S. economy is estimated to have added +339,000 jobs in May. Revisions to figures for previous months were positive. The value for March rose +52,000 to +217,000. The value for April rose +41,000 to +294,000. The current twelve-month average is +339,000 jobs per month, the same level as the increase in May.
The unemployment rate increased from 3.4% to 3.7% between April and May. The increase in May was driven by a +440,000 month-over-month increase in unemployed people. The labor force also expanded slightly (up +130,000 month-over-month, up +2.5 million year-over-year). Since March 2022, the unemployment rate has been between 3.4% and 3.7%. Unemployment below four percent is rare, with only three other prolonged periods since 1950 (early 1950, the late 1960s, and the period before COVID).
Average hourly wage growth was +4.3% year-over-year in May. Earnings growth has been trending lower since March 2022 (when wage growth set a post-COVID high of +5.9%), when the Federal Reserve began increasing interest rates.
Consumer Confidence & Spending
The Conference Board’s Index of Consumer Confidence decreased slightly month-over-month in May (from 103.7 to 102.3). Values have been essentially unchanged since February (ranging between 102 and 104). Current levels are higher than last summer (below 100 in June and July 2022) but remain well below the post-COVID highs set in the summer of 2021 (128.9 in June 2021). The long-term average is 94.0 (since 1970).
In inflation-adjusted terms, overall consumer spending was slightly higher month-over-month in April (+0.5%) and was up +2.3% year-over-year. Spending on garments decreased month-over-month for six of the last seven months (growth in January, but otherwise negative month-over-month from October-April). Year-over-year, apparel spending was lower in April (-0.7%). Some of the recent slowdown in apparel spending may be related to a calming in consumer demand following outsized growth with stimulus after the pandemic. Even with the recent deceleration, spending on garments in April was 21% higher than the average in 2019. The average annual rate of growth in the five years before COVID was +2.6%.
Consumer Prices & Import Data
Retail prices for apparel increased month-over-month in each of the last six months of data (+0.2% in April, increases between +0.2% and +1.0% since November 2022). Relative to the average in 2019, before the pandemic, retail apparel prices in April were +5.2% higher.
The average import cost per square-meter equivalent (SME) of cotton-dominant apparel was $3.94 in seasonally-adjusted terms. This is down 8% from the recent peak of $4.30/SME (November 2022) but remains higher than levels before the pandemic (averaged $3.36/SME in 2018 and $3.45/SM in 2019) and significantly higher than the post-COVID lows near $3.00/SME from November 2020 through March 2021.