U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview
The Federal Reserve lowered interest rates by half a percentage point last month. The decrease represented a policy reversal, ending the cycle of rate increases that began in March 2022. During that period, the Fed lifted rates from effectively zero to levels over five percent. This was the steepest set of rate increases since the 1980s.
The half-point reduction was at the more aggressive end of expectations. Nonetheless, the current rate maintained by the central bank is well above the levels before the pandemic and is also higher than the “neutral” rate. The neutral interest rate is a theoretical value representing the interest rate where inflation and growth are in balance and interest rates are neither stimulative nor restrictive. As a theoretical concept, its actual value cannot be truly known; it can only be estimated.
There is a range of estimates for the neutral rate, but because the Federal Reserve has been saying it will remain vigilant about inflation (and less concerned about the labor market), the Federal Funds Rate that the Fed controls remains higher than those estimates. With the policy rate above the neutral rate, an interpretation of the recent decrease should be that the central bank is pushing less hard on the brakes. This is different than stepping on the economic accelerator, like the Fed did after that financial crisis and after the COVID pandemic.
In China, the government recently announced policy changes that can be considered a push on the accelerator. It lowered interest rates and reduced restrictions on bank lending to help address deflation and sluggish demand. Policies were also adjusted to decrease payments on existing mortgages and to cut the required downpayments for home purchases. These changes may help address some of the challenges in the Chinese housing sector, where an estimated 70% of Chinese household wealth is concentrated. There are questions about the appetite for credit in China and, therefore, the effectiveness of monetary policy. For this reason, Chinese officials have suggested they may also pursue fiscal stimulus to leverage government spending to support economic growth. Details regarding a comprehensive spending package have yet to be released.
Both the U.S. and China are major consumer markets for cotton products, and policy revisions in each country can be considered supportive of demand growth. In addition, Europe appears to be moving beyond the recessionary conditions that existed last year.
Employment
The U.S. economy is estimated to have added +254,000 new jobs in September. This was the largest monthly increase since March and was well above the average over the last six months (+176,000). Revisions to existing figures for previous months were positive, with the estimate for July increasing +55,000 to +144,000 and the estimate for August increasing +17,000 to +159,000.
The unemployment rate decreased slightly, from 4.2% to 4.1%. In July, the unemployment rate set its recent high of 4.3%. The decreases since July suggest that the gentle upward trend that has been in place since early 2023 (the unemployment rate reached levels as low as 3.4% around in the first half of 2023). If sustained, the current pause in the upward trend in unemployment can give the Federal Reserve more room to maintain higher rates to combat inflation if necessary.
The year-over-year change in wage growth has also taken a pause from its recent trend. In March 2022, the rate of wage growth reached a peak of 5.9% year-over-year. Since then, it has been moving lower. In July 2024, it was 3.4%. More recently, in August and September, however, the rate of year-over-year growth has increased (3.9% in July and 4.0% in September).
Consumer Confidence & Spending
The Conference Board’s Index of Consumer Confidence decreased -6.9 points in September to 98.7. This is close to the readings in April and June and remains within the range experienced since August 2021, when values have held been between 95 and 115.
Overall consumer spending increased +0.2% month-over-month in August. Year-over-year, overall spending was +2.9% higher. Consumer spending on apparel was down -0.8% month-over-month in August. Year-over-year, spending on garments was +1.8% higher. The pullback in apparel spending in August followed some strength in June, when spending was +4.2% higher. In May and July, clothing spending was +2.7% and +2.8% higher year-over-year, nearly matching the values for overall spending growth in those months.
Consumer Prices & Import Data
The CPI for garments increased +0.6% month-over-month and year-over- year in September. The current price level is near the highest since COVID (value in April was marginally higher) and is +6.4% higher than the average in 2019.