U.S. Macroeconomic Indicators & the Cotton Supply Chain
Macroeconomic Overview
The Federal Reserve appears poised to decrease interest rates after its meeting September 17-18th. While a cut is widely anticipated, it remains unknown how aggressive the rate decrease will be. A gradual approach would suggest a quarter percentage point reduction. A stronger move could involve a decline of half a percentage point.
There have been alternating views on the outlook for Fed interest rate policy for some time. About a year ago, it was generally accepted that a series of rate cuts would have already been implemented by now. However, inflation bounced higher around the start of the 2024 calendar year, and the projected timing for rate decreases was pushed back.
More recently, inflation resumed its downward trend. The latest reading for the “core” measure targeted by the Fed is 2.5% (July). This is a full percentage point lower than it was in March 2024 and about a third of the post-COVID peak of 7.1% (June 2022). The Federal Reserve’s official target for inflation is two percent. The latest reading is not far away from that level, and the trend suggests that price increases could continue to slow.
In addition to price stability, a second element of the Fed’s mandate is to promote the “maximum sustainable level” of employment. While the unemployment rate remains low by historical standards, it has been ticking higher since the second half of 2023 (currently 4.2%, was near 3.5% around the middle of 2023).
The combination of slowing inflation and a weakening labor market has likely given the Federal Reserve the reasons it needed to lessen the brakes on the economy and lower interest rates. Nonetheless, interest rates are not expected to ease from their current restrictive levels all the way down to levels that could be considered stimulative.
It would take an extended series of decreases for rates to approach the rate of inflation. If interest rates are higher than inflation, some incentive for saving at the expense of spending remains, which implies continued (if weakening) headwinds for consumer demand.
The U.S. consumer has proven surprisingly resilient since the pandemic, and the latest readings continue to be strong. Concern has been growing because of some of the slowing in the labor market and because savings accumulated from stimulus may be drawing down. But, in the past three months of data (May-Jul), the year-over-year rate of growth averaged 2.8%. During the same period one year ago, the rate averaged 2.1%. During the same period two years ago, the rate averaged 2.0%.
Employment
The U.S. economy is estimated to have added +142,000 new jobs in August. Revisions to previous months were negative. The figure for June was lowered -61,000 positions to +118,000. The figure for July was lowered -25,000 to +89,000. The current twelve-month average is +197,000.
The unemployment rate decreased from 4.3% to 4.2% in August. In the first half of 2023, the unemployment rate reached its post-pandemic nadir at exceptionally low levels near 3.5%. Since the first half of 2023, two million additional people joined the labor force, which contributed to the rise in the rate.
Wage growth increased in August from 3.6% to 3.8%. The month-over-month gain contrasts with the downward trend that has been in place since March 2022 (when the post-COVID and post-stimulus rate of wage growth peaked at +5.9%). Despite the slower rate of income growth, increases in wage rates have exceeded the inflation rate since May 2023.
Consumer Confidence & Spending
The Conference Board’s Index of Consumer Confidence increased +1.4 points to 103.3. This is the highest reading since March, but it remains just a few points higher than the recent low near 98 (April and June). Since August 2021, values have been between 95 and 115.
Overall consumer spending increased +0.4% month-over-month and +2.7% year-over-year in July. Spending growth accelerated over the past few months, with these recent values higher than rates posted in recent years. Apparel spending also shifted higher recently, the average year-over-year growth between May and July was 3.5%. Last year, it averaged 2.1% and it was 2.0% in 2022.
Consumer Prices & Import Data
The CPI for garments decreased month-over-month in July (-0.5%). Year-over-year, average retail prices were flat (+0.01%). Average import costs for cotton-dominant apparel in July, represented by the value per square meter equivalent, increased +1.2% month-over-month (seasonally-adjusted). Year-over-year, average import costs for cotton-dominant garments were down -7.3%. Relative to the post-COVID peak, sourcing costs were -13.0% lower.