Cotton Incorporated
Executive Cotton Update
U.S. Macroeconomic Indicators & the Cotton Supply Chain
January 2025
Macroeconomic Overview: The Federal Reserve decided to decrease interest rates by a quarter of a point after its meeting on December 18th. This rate cut was widely anticipated by markets. Markets may not have been expecting details released in comments following the meeting that indicated only two cuts were now forecast for 2025. This is less than the four cuts that officials had hinted at previously.
The revised outlook for U.S. interest rates had immediate effects on financial markets. Foreign exchange was among the markets experiencing volatility. Higher U.S. interest rates can make U.S. securities more attractive and a greater flow of money into the U.S. lifts the USD. Equity markets moved lower. Higher rates can slow growth and potentially affect company earnings. The Federal Reserve indicated that progress on inflation appears to have stalled and stated that inflationary concerns were their primary reason for the changes to their outlook for interest rates.
In 2025, the central bank will have to balance rate moves with any policy changes that may surface with the new administration. It remains unknown whether tariff rates will be changed and by how much. However, higher tariffs imply higher sourcing costs, and higher sourcing costs can create inflationary pressure. If tariffs are increased significantly, interest rates may have to rise alongside them. The combination of higher prices and higher interest rates could weigh on consumer spending and economic growth.
In the meantime, the U.S. economy continues to perform relatively well. The labor market is adding jobs and unemployment remains at a historically low level. Wages are rising faster than they did in the period between the financial crisis and the pandemic, and wages have been increasing faster than inflation for a year and a half.
GDP figures are published with a lag, but the latest GDP figure indicates the U.S. economy grew at a +3.1% annualized rate (third revision to the estimate for the third quarter). This is +0.3 points higher than the previous estimate and is the strongest rate of quarterly growth this calendar year. Consumer spending was the largest contributor to GDP growth in the third quarter.
The International Monetary Fund (IMF) is forecasting U.S. economic growth to be 2.8% in 2024 and to slow to 2.2% in 2025. Policy and geopolitically uncertainty are factors clouding the outlook in the new year and beyond.
Employment: The U.S. economy is estimates to have added +256,000 jobs in December. Revisions to previous months were mixed. The figure for October was lifted by +7,000 to +43,000. The figure for November was lowered by -15,000 to +212,000. The current twelve-month average is +186,000.
The unemployment rate decreased marginally, from 4.2% to 4.1%, and remains at a low level.
Wages were up +3.8% year-over-year. While this growth exceeds anything experienced between the financial crisis and the pandemic, it is lower than its post-stimulus peak of 7.0% in March 2022. Wage growth has exceeded inflation since the first quarter of 2023.
Consumer Confidence & Spending: The Conference Board’s Index of Consumer Confidence decreased -8.1 points to 104.7 in December. This represented a reversal relative to recent months, when values climbed from levels below 100 to those over 110. Even with this month’s decrease, the index remains within the range between 95 and 115 that has contained values since the second half of 2021.
Overall consumer spending increased +0.3% month-over-month in November. Year-over-year, overall spending was +2.9% higher. Spending on garments was up +1.2% month-over-month and was +2.9% higher year-over-year.
Consumer Prices & Import Data: After a relatively steep -2.0% month-over-month decrease in October, the CPI for garments increased in November (+0.3%, November is the latest month with data available). Year-over-year, retail apparel prices were +1.3% higher in November. Recent price levels rank among the highest posted since 2001. Current values for the CPI for apparel are about 3% higher than the levels registered between 2012 and 2018 (another period when retail prices were higher). Retail prices moved lower ahead of the pandemic, but have generally been rising since the COVID-driven low was set in May 2020.
Average import prices, as represented by the seasonally-adjusted average value per square-meter equivalent (SME) of cotton-dominant apparel, were $3.60/SME in November. This is -15% lower than the post-COVID peak of $4.26/SME and +5% higher than the average in 2019 (before COVID).
