Executive Cotton Update May 2023

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U.S. Macroeconomic Indicators & the Cotton Supply Chain

Macroeconomic Overview

After a meeting in early May, Federal Reserve officials decided to make its tenth increase in interest rates since March of last year. Those increases brought the Federal Funds rate the central bank controls to the highest levels (a range of 5.00-5.25%) since 2007. Current rates are five full percentage points higher than they were a little more than one year ago.

The speed and magnitude of the change in interest rates presented a series of challenges to business practices. Financing costs have risen sharply across all industries, and a focus on cost-cutting has already led to layoffs at several large corporations. Banks, which rely on some consistency in relationships between short and long-term interest rates for profits, have experienced strain, and a few have already made headlines by collapsing under the pressure. Fear of contagion in the financial sector has heightened concern about the possibility of a recession.

History has shown that economic downturns tend to follow interest rate increases. Rate increases between 1999-00 reined in speculation in the tech sector (Fed Fund rate rose from 5.00 to 6.50%) but likely contributed to the recession in the early 2000s that came with the popping of the dot-com bubble. Rate increases between 2004-06 reined in speculation in sub-prime lending and the housing market (Fed Funds rate rose from 1.25 to 5.25%), precipitating a crash in housing prices and the financial crisis of 2008-09. After a prolonged period of extremely low rates after the financial crisis (Fed Funds rate held between 0.00 to 0.25% from 2009-15), the Federal Reserve lifted rates to normalize levels (Fed Funds rate from 0.25% to 2.50%). Even though these increases were less than half the size of increases in the latest round of tightening, the central bank soon had to reverse course, and the Fed lowered rates due to concerns about slower growth amid escalation of the trade dispute.

With COVID, the Federal Reserve dropped interest rates back to zero and further eased monetary conditions through quantitative easing. This contributed to the “everything rally” that lifted prices for many assets. Rate increases over the past year were followed by decreases in several asset classes (e.g., cryptocurrency, housing, and commodities like cotton).

It remains to be seen if a recession may eventually surface. After the latest 0.25-point increase (May 3rd), Federal Reserve chairman Jerome Powell said, “It’s possible this time really is different.” He then stated, “The reason is there’s just so much excess demand, really, in the labor market,” continuing, “The case of avoiding a recession is, in my view, more likely than that of having a recession.” Uncertainty dominates, but recent labor market statistics appear to support his position. Despite interest rates rising five percentage points over the past 14 months, the unemployment rate dropped to 3.4% in April, matching the lowest level since 1968.


The U.S. economy is estimated to have added +253,000 jobs in April. Revisions to figures for previous months were strongly negative. The value for February fell -78,000 to +326,000. The value for March fell -71,000 to +165,000. The current twelve-month average is +333,000 jobs per month.

The unemployment rate decreased from 3.5% to 3.4% between March and April. Average hourly wage growth was 4.5% year-overyear last month. Earnings growth has been weakening since interest rates began to increase (March 2022, when they reached a post- COVID peak of 5.9%).

Consumer Confidence & Spending

With a 2.7-point drop in April, the Conference Board’s Index of Consumer Confidence fell to 101.3. This is its lowest value since July 2022 (95.3). The index continues to hold to levels above the long-term average (near 93) but is also well below the post-COVID peak of 128.9 (June 2021).

Overall consumer spending was flat month-over-month in March (-0.03%) but was up 1.9% year-over-year. Spending on garments has been negative month-over-month for five of the last six months (growth in February, otherwise, apparel spending was negative month-over-month from October-March). Year-over-year, apparel spending was flat in March (-0.05%). Nonetheless, spending on garments in March 2022 was 21% higher than during the same month in 2019.

Consumer Prices & Import Data

Retail prices for apparel have increased month-over-month in each of the last five months of data (+0.5% in March). Relative to the average in 2019, before the pandemic, retail apparel prices were 4.9% higher in March. The average import cost per square-meter equivalent (SME) of cotton-dominant apparel was $3.92 in seasonally-adjusted terms. This is down 9% from the recent peak of $4.33/SME (November) 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.

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