U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview
Expectations regarding interest rate cuts by the Federal Reserve have been pared back and projected further into the future. Several months ago, it was anticipated that the central bank could begin lowering interest rates as soon as this month and that as many as five interest rate decreases were possible in 2024. Indications are now that rate cuts may not start until June and that only three rate decreases appear more likely.
Reasons why those projections have been revised could be tied back to the Federal Reserve’s dual mandate. One of the Fed’s objectives is to hold inflation near two percent. The other mandate is to support the economic conditions that can lead to full employment (full employment is a theoretical concept describing the highest level of employment that the economy can maintain without causing excessive inflation).
Recent inflation data indicate further progress is needed to reach the targeted two percent level. The “core” price deflator used by the Federal Reserve to track inflation suggested a +2.8% year-over-year increase in prices in January (latest available data). With inflation nearly a whole percentage point higher than the target, there could be some reluctance to ease off the monetary brakes before it becomes more apparent that the pace of price increases is definitively on track to meet the target.
In addition, the strength of the economic situation has given the Federal Reserve room on the second element of its mandate. With unemployment below four percent, it is a historically low level, and there is not a pressing need to lower rates to stimulate growth. Figures for U.S. GDP were revised higher in recent quarters, and the stock market has been setting a series of record highs. Notably, the labor market continues to add jobs, and wages are growing faster than inflation. If maintained, this can support consumer spending power and, therefore, consumer spending.
Employment
The U.S. economy is estimated to have added +275,000 new jobs in February. Revisions to previous months were negative, with the figure for December dropping -43,000 to +290,000 and the figure for January falling -124,000 to +229,000. The current twelve-month average is +229,000.
The unemployment rate increased from 3.7% to 3.9% month-over-month. Despite the increase, it remains below four percent, a historically low level. The unemployment rate is the ratio of the number of employed people over the number in the labor force (people wanting to work). A potential signal of weakness in this month’s report was that the increase in the unemployment rate was a result of a decrease in the count of the number of people employed rather than an increase in the labor force (the unemployment rate is based on information collected from a survey of households, while the payroll data used to describe job gains are from a survey of businesses).
Wages increased +4.3% year-over-year in February. Wage growth shifted downward after the post-stimulus peak of +5.9% was set in March 2022. Over the past five months, however, wage growth has been steady at around +4.3%.
Consumer Confidence & Spending
After three consecutive months of increases, the Conference Board’s Index of Consumer Confidence decreased by -4.2 points month-over-month in February. The current value of 106.7 is near the middle of the range between 95 and 115 that has contained values since the third quarter of 2021.
In inflation-adjusted terms, overall consumer spending decreased -0.1% month-over-month in January. This followed a strong +0.6% increase in December (which would correspond to an annual increase of more than seven percent if maintained for twelve months). Year-over-year, overall spending was +2.1% higher in January.
Consumer spending on apparel has been strong in recent months. In January, it increased +0.8% month-over-month, which followed a +1.4% gain in December and a +1.1% gain in November. The strength of this growth pulled year-over-year rates higher. After contracting year-over-year from March to October 2023, the annual rate of change in spending on clothing was positive in November (+1.5%), December (+2.4%), and January (+1.3%).
Consumer Prices & Import Data
The CPI for garments decreased -0.6% in January. Year-over-year, retail apparel prices were essentially flat +0.1%. While following a general downtrend since November 2022, average import costs, represented by the price per square meter equivalent (SME) of cotton-dominant apparel, increased 1.5% month-over-month in January. Year-over-year average import prices were down -9.8%. Relative to the average in 2019, sourcing costs in January were +8.3% higher.