Executive Cotton Update U.S. Macroeconomic Indicators & the Cotton Supply Chain January 2019 www.cottoninc.com Macroeconomic Overview: As was expected given strong consumer confidence and accelerating wage growth, the 2018 holiday sales period was a good one for retailers with results higher than forecasted. Mastercard SpendingPulse (data collected from credit card network as well as surveys to cover spending by cash and check) reports that sales were up 5.1% year-over-year between November 1 st and December 24 th. This exceeds the projection issued by the National Retail Federation (NRF, trade group representing U.S. retailers) that called for growth between 4.3-4.8%. Mastercard SpendingPulse found that apparel was among the most popular categories this year, with spending on clothing reported to have been 7.9% higher than last year. This represents the strongest rate of growth for holiday apparel spending since 2010. While 2018 ended on a positive note, there are questions about the outlook for 2019. The current U.S. economic expansion ranks as the second longest on record (it officially began on June 2009, making it currently 115 months old, the longest expansion occurred in the 120 months between March 1991 and March 2001). There have been a few indicators that have shown some weakening. Examples include the housing market, where sales began to slow in the spring and prices have started to level off, and in U.S. manufacturing activity, where the latest purchasing managers index (PMI) registered its biggest monthly drop since 2008 (but nonetheless continues to signal expansion in activity). The labor market remains strong, with hiring and wages continuing to grow, but volatility in financial markets underlines mounting concern. A source of concern may be that the Federal Reserve may increase interest rates too high too soon. In December, the Federal Reserve raised interest rates for the fourth time in 2018. With the latest increase (0.25 percentage points), the Federal Funds target rate rose to 2.5%. This is well-above the unprecedented low levels of 0.25% that were maintained in the wake of the financial crisis (2009-2015). Even with the recent string of increases, apart from this period of unprecedented low rates, current rates rank as the lowest since the early 2000s. And, apart from the early 2000s, current rates are the lowest since the early 1960s. The latest comments from the Federal Reserve officials suggest they feel that interest rates are approaching a neutral level (i.e., not stimulative and not contractionary) and that the central bank may be less aggressive in increasing interest rates in 2019. Another source of concern could stem from slowing growth outside the U.S., particularly in China, which has emerged as an increasingly important engine for global growth in recent decades. A pair of Chinese PMIs (one governmental and one from the private sector) signaled contraction in December. The latest Chinese retail sales data (November), were the weakest in 15 years. A major source of uncertainty continues to be the trade environment. Some easing of tensions appeared with the meeting in early December, with the U.S. delaying the round of tariff increases initially scheduled to start with the onset of 2019. Another round of negotiations is scheduled for the week of January 7 th. Employment: The U.S. economy is estimated to have added 312,000 jobs in December. Revisions to figures for previous months raised existing numbers for October (from +237,000 to +274,000) and November (from +155,00 to +176,000). The 12-month average expansion in payrolls is 220,000. Over the same time period last year, the average increase was 182,000. Due to an increase in the estimated size of the labor force, the unemployment rate rose from 3.8% to 3.9% month-over-month. Relative to last year, 2.6 million more Americans wanted to work in December. Average hourly earnings for private employees increased 3.2% year-over-year in December. This is the third consecutive month that wages increased at a rate above three percent and each of these readings rank as the three highest since the financial crisis. Consumer Confidence & Spending: The Conference Board s Index of Consumer Confidence decreased 8.3 points last month (from 136.4 to 128.1). This was the biggest monthly decrease since 2015, but even with the decline, values for the index are strong compared to the long-term average near 100. Overall consumer spending increased 0.3% month-over-month in November and was up 2.9% year-over-year. Consumer spending on apparel increased 1.7% month-over-month and was up 4.1% year-over-year. For each of the past seven months, year-over-year growth in apparel spending has outpaced overall spending. Consumer Prices & Import Data: Retail prices for apparel decreased 1.2% month-over-month in November. Year-over-year, the CPI for garments was down 0.3%. Due to the government shutdown, trade data were not released as scheduled this month. U.S. Macroeconomic & Cotton Supply Chain Charts Macroeconomic Indicators Industry & Textiles Retail Currencies Cotton GDP Growth Leading Indicators Industrial Production Consumer Spending Weighted Index U.S. Balance Sheet Interest Rates Consumer Conf. Inventory/Shipments Inventory/Sales Asia Fiber Prices ISM Indices Employment U.S. Yarn Exports Consumer Prices The Americas Housing Polyester PPI Europe
Executive Cotton Update U.S. Macroeconomic Indicators & Cotton Prices January 2019 Macroeconomic Data Quarterly Data Values in Recent Quarters 5 year 1 year 6 month 3 month Q1 : 2018 Q2 : 2018 Q3 : 2018 Unit Source Growth in US Real GDP 2.5% 2.3% 3.8% 3.4% 2.2% 4.2% 3.4% % Chg. Quarter/Quarter Department of Commerce Monthly Series with Latest Data for December Values in Recent Months 5 year 1 year 6 month 3 month October November December ISM Index of Manufacuring Activity 54.9 55.7 59.4 58.9 57.7 59.3 54.1 Index Institute for Supply Management ISM Index of Non Manufacturing Activity 56.7 56.9 59.3 60.9 60.3 60.7 n/a Index Institute for Supply Management Consumer Confidence 106.2 116.0 133.2 136.5 137.9 136.4 128.1 Index The Conference Board Change in Non Farm Payrolls 211.1 197.0 204.7 189.7 274 176 312 Thousands of jobs Bureau of Labor Statistics Unemployment Rate 5.0% 4.4% 3.8% 3.7% 3.8% 3.7% 3.9% Rate Bureau of Labor Statistics Monthly Series with Latest Data for December Values in Recent Months 5 year 1 year 6 month 3 month October November December Unit Source US Interest Rates Federal Funds 0.7% 1.0% 2.0% 2.1% 2.2% 2.2% 2.3% Interest rate Federal Reserve 10 year Treasury Bill 2.4% 2.3% 3.0% 3.1% 3.2% 3.1% 2.8% Interest rate Federal Reserve Index of Leading Economic Indicators 101.2 104.4 111.2 111.8 111.9 111.6 111.8 Index The Conference Board Housing Starts 11.5 12.1 12.3 12.4 1.2 1.2 1.3 Annual pace, millions of units Department of Commerce Existing Home Sales 5.3 5.5 5.3 5.2 5.2 5.2 5.3 Annual pace, millions of units National Association of Realtors Industrial and Textile Data Monthly Series with Latest Data for November Values in Recent Months 5 year 1 year 6 month 3 month September October November Unit Source US Industrial Production 104.5 104.3 108.5 109.0 108.9 108.7 109.4 Index, 2002=100 Federal Reserve Polyester Fiber PPI 107.2 107.7 106.8 105.2 98.2 97.9 98.2 Index, December 2003=100 Bureau of Labor Statistics Monthly Series with Latest Data for October Values in Recent Months 5 year 1 year 6 month 3 month August September October Unit Source Bale Equivalence of US Cotton Yarn & Fabric Exports 3.2 3.1 3.0 3.0 3.0 2.9 3.0 million 480lb bales USDA ERS Monthly Series with Latest Data for October Values in Recent Months 5 year 1 year 6 month 3 month August September October Unit Source US Textile Mill Inventory/Shipments Ratio 1.27 1.30 1.29 1.30 1.28 1.28 1.29 Ratio Department of Commerce Retail Data Monthly Series with Latest Data for November Values in Recent Months 5 year 1 year 6 month 3 month September October November Unit Source US Real Consumer Spending All Goods and Services 2.9% 2.7% 2.9% 2.8% 2.7% 3.0% 2.8% % Chg. Year/Year Department of Commerce Clothing and Shoes 2.8% 2.7% 4.8% 4.6% 4.8% 5.0% 4.1% % Chg. Year/Year Department of Commerce Consumer Price Indices Overall 1.5% 1.9% 2.6% 2.3% 2.3% 2.5% 2.2% % Chg Year/Year Bureau of Labor Statistics Apparel 0.4% 0.1% 0.3% 0.3% 0.5% 0.2% 0.3% % Chg. Year/Year Bureau of Labor Statistics Monthly Series with Latest Data for October Values in Recent Months 5 year 1 year 6 month 3 month August September October Unit Source Retail Inventory/Sales Ratio Clothing and Clothing Accessory Stores 2.4 2.4 2.2 2.2 2.2 2.2 2.2 Ratio Department of Commerce Department Stores 2.1 2.1 2.0 2.1 2.0 2.0 2.1 Ratio Department of Commerce
Executive Cotton Update Daily Cotton Price and Currency Data January 2019 Daily Cotton Price Data Averages over Recent Months 5 year 1 year 6 month 3 month October November December Unit Source NY Nearby 72.1 73.6 80.7 77.3 77.5 77.4 76.9 cents/pound ICE A Index 80.5 83.0 90.0 86.4 86.8 86.8 85.6 cents/pound Cotlook Daily Currency Data Averages over Recent Months 5 year 1 year 6 month 3 month October November December Unit Source Dollar Trade Weighted Exchange Index 117.6 122.4 126.1 127.3 126.1 127.7 128.1 Index, January 1997=100 Federal Reserve Asian Currencies Chinese Renminbi 6.48 6.66 6.83 6.89 6.88 6.89 6.89 Chinese Renminbi/US dollar Reuters Indian Rupee 65.09 66.77 70.76 72.04 73.24 72.50 70.37 Indian Rupee/US dollar Reuters Japanese Yen 111.73 110.64 112.27 113.60 114.09 113.11 113.61 Japanese Yen/US dollar Reuters Pakistani Rupee 106.80 109.94 127.19 131.24 124.18 132.13 137.40 Pakistani Rupee/US dollar Reuters North & South American Currencies Brazilian Real 3.19 3.44 3.85 3.79 3.85 3.70 3.83 Brazilian Real/US dollar Reuters Canadian Dollar 1.26 1.31 1.31 1.30 1.28 1.31 1.32 Canadian dollar/us dollar Reuters Mexican Peso 17.14 18.88 19.41 19.69 18.75 20.05 20.26 Mexican Peso/US dollar Reuters European Currencies British Pound 0.70 0.75 0.77 0.78 0.77 0.77 0.79 British Pound/US dollar Reuters Euro 0.86 0.88 0.87 0.88 0.87 0.88 0.88 Euro/US dollar Reuters Swiss Franc 0.96 0.98 0.99 1.00 0.99 1.00 1.00 Swiss Franc/US dollar Reuters Turkish Lira 3.26 3.80 5.52 5.57 6.02 5.42 5.28 Turkish Lira/US dollar Reuters
Percent Growth in U.S. Real Gross Domestic Product 10 % Chg from Previous Quarter March 4, 2009 8 6 4 2 0-2 -4-6 -8-10 09:Q1 10:Q1 11:Q1 12:Q1 13:Q1 14:Q1 15:Q1 16:Q1 17:Q1 18:Q1 Seasonally Adjusted Annual Rate; Source: Department of Commerce *Based on chained 2005$. 8 7 U.S. Interest Rates Federal Funds 10 Year Treasury Bill 6 5 4 3 2 1 0 Source: Federal Reserve
Index Values over 50 Indicate Expansion Index Values over 50 Indicate Expansion ISM Index of Manufacturing Activity 70 65 Manufacturing Activity Manufacturing Employment 60 55 50 45 40 35 30 25 20 Source: Institute for Supply Chain Management 70 65 ISM Index of Non-Manufacturing Activity 60 55 50 45 40 35 30 25 Service Sector Activity Service Sector Employment 20 Source: Institute for Supply Chain Management
Index (1985 = 100) Index (2004 = 100) U.S. Leading Economic Indicators 120 110 100 90 80 70 60 Source: The Conference Board 140 U.S. Consumer Confidence 120 100 80 60 40 20 Source: The Conference Board
Percent Change in U.S. Civilian Employment 600 400 200 0-200 -400-600 -800-1000 Source: Bureau of Labor Statistics 11 U.S. Unemployment Rate 10 9 8 7 6 5 4 3 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Source: Bureau of Labor Statistics
Million Units Million Units U.S. Housing Starts 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Seasonally Adjusted Annual Rate; Source: Department of Commerce 6.0 U.S. Existing Home Sales 5.5 5.0 4.5 4.0 3.5 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Seasonally Adjusted Annual Rate; Source: National Association of Realtors
Ratio % Change from Year Ago U.S. Industrial Production - Overall & Textile 30% Total Textiles 20% 10% 0% -10% -20% -30% Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Source: Federal Reserve. Historical data revised to 1997 baseline. 1.8 U.S. Textile Mill Inventory to Shipments Ratio 1.6 1.4 1.2 1.0 Seasonally Adjusted; Source: Department of Commerce
December 1989=100 Million Bales US Cotton Yarn Exports 4.0 3.6 3.2 2.8 2.4 2.0 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Seasonally Adjusted Annual Rate Source: USDA ERS 130 Polyester Fiber Producer's Price Index 120 110 100 90 80 Dec-08 Nov-09 Oct-10 Sep-11 Aug-12 Jul-13 Jun-14 May-15 Apr-16 Mar-17 Feb-18 Source: Bureau of Labor Statistics
% Change from Year Ago % Change from Year Ago 10% U.S. Real Consumer Spending - All Goods & Services 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Seasonally Adjusted Annual Rate; Source: Department of Commerce *Based on chained 2005$. 10% 8% 6% U.S. Real Consumer Spending on Clothing 4% 2% 0% -2% -4% -6% -8% -10% Seasonally Adjusted Annual Rate; Source: Department of Commerce *Based on chained 2005$.
% Change from Year Ago Ratio 3.0 2.8 U.S. Retail Inventory to Sales Ratios Department Stores Apparel/Accessory Stores 2.6 2.4 2.2 2.0 1.8 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Seasonally Adjusted; Source: Department of Commerce Dec-15 Dec-16 Dec-17 Source: Department of Commerce 8% 6% U.S. Consumer Price Indices - Overall & Apparel Overall Apparel 4% 2% 0% -2% -4% Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Source: Bureau of Labor Statistics
Current Month 5 Years Ago = 100 Current Month 5 Years ago = 100 Trade Weighted Exchange Index for U.S. Dollar 130 120 110 100 90 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Source: Federal Reserve Source: Federal Reserve 140 Asian Currencies vs. U.S. Dollar Pakistani Rupee Indian Rupee Japanese Yen Chinese Renminbi 120 100 80 60 40 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Source: oanda.com Source: Reuters
Current Month 5 Years Ago = 100 Current Month Five Years Ago = 100 North & South American Currencies vs.u.s. Dollar 130 Mexican Peso Brazilian Real Canadian Dollar 110 90 70 50 30 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Source: oanda.com Source: Reuters Index of European Currencies vs. U.S. Dollar 160 140 Euro Turkish Lira Swiss Franc British Pound 120 100 80 60 40 20 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Source: oanda.com Source: Reuters
Cents Per Pound U.S. Balance Sheet million 480 lb. bales 2014/15 2015/16 2016/17 2017/18 2018/19 2018/19 November December Beginning Stocks 2.4 3.7 3.8 2.8 4.3 4.3 Production 16.3 12.9 17.2 20.9 18.4 18.6 Imports 0.0 0.0 0.0 0.0 0.0 0.0 Supply 18.7 16.6 21.0 23.7 22.7 22.9 Mill-Use 3.6 3.5 3.3 3.2 3.3 3.3 Exports 11.2 9.2 14.9 15.8 15.0 15.0 Demand 14.8 12.6 18.2 19.1 18.3 18.3 Ending Stocks 3.7 3.8 2.8 4.3 4.3 4.4 Stocks/Use Ratio 24.6% 30.2% 15.1% 22.5% 23.5% 24.0% Year of Daily Cotton Prices 105 100 A Index NY Nearby 95 90 85 80 75 70 65 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Sources: ICE Futures U.S. & Cotton Outlook