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Textile Industry Grappling With Macro- and Microeconomics to Avoid ‘Downhill Spiral’ as Inflation Looms

Forecasts of a recession on the horizon have often been linked to the U.S.-China trade war and its connection to broader indicators of a global commerce downturn.

Given that the bilateral dispute has led to tit-for-tat import tariffs by both countries and that China is the largest U.S. supplier of apparel, the trade impasse has the U.S. textile and apparel industries in its crosshairs, along with other industries that rely on cross-border trade.

In other words, the macroeconomic issues and conditions and microeconomic sectors and supply chains are blurring into one.

Macro picture

IHS Markit chief economist Nariman Behravesh and executive director Sara Johnson said in their September economic forecast that “the trade war and oil market disruption have increased the risk of recession” in the global market.

The economists noted that August saw another intensification of the trade conflict between the U.S. and China, which was followed in mid-September by the attack on Saudi Arabian oil production facilities, resulting in an oil price spike.

“Both are bad news for the global economy, coming at a time when growth is already slowing,” they said. “Partly because of the trade war, IHS Markit again downgraded the growth forecasts for all the major economies during the past month.”

In the U. S., Behravesh and Johnson said, “New tariffs will hurt growth, but not kill it…The outlook for the next few years has been lowered in response to the Trump administration’s new 15 percent tariffs on most goods imports from China that had previously escaped tariffs and an increase in the tariff rate to 30 percent on imports from China that had been subject to a 25 percent rate.”

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Bill Adams, senior economist at PNC Financial Services, speaking at last week’s Fall Fiber Meeting of the National Council of Textile Organizations (NCTO), noted that the Inverted Yield Curve–the difference between 10-year interest rates on government borrowing versus three-month borrowing–indicates that “a recession is around the corner.”

“We at PNC Bank think that despite this signal of heightened recession risk in the next couple of quarters, we’re still more likely to see a continued economic expansion in the U.S.,” Adams said.

On the negative side, he noted a slowdown in job growth in recent months, “a signal that the overall economy in the U.S. is slowing, as well.”

“The manufacturing side of the U.S. economy is the part where we’ve seen a particularly sharp slowdown,” he said, adding that it’s also a global trend.

On the positive side, Adams said, “We have important sources of resilience in the U.S. economy, one of which is the small business sector…The other part of the U.S. economy that is holding up quite well is the U.S. consumer. Consumer confidence is at or near all-time highs in the last couple of months. The trend has stopped being so sharply up, but nevertheless consumer confidence is holding at very strong levels.”

He noted that wage growth has finally begun to pick up and is outpacing inflation, and the unemployment rate is close to a record low.

“The takeaway for you,” Adams told the fiber executives, “is that we’re forecasting the slowdown to continue and intensify–we don’t forecast a recession. This is balancing the headwinds to the U.S. economy on the large business side and trade uncertainty and what that does to businesses that have global supply chains versus the boost to the economy for the small business side, the consumer side and industries that are benefiting from higher tariffs on foreign imports.”

Micro picture

That led to Kim Glas, president and CEO of NCTO, to tell Souring Journal on the sidelines of the meeting: “If there is a downturn in the economy, I don’t think the textile industry is immune to those swings. We look at the data very closely to understand when there’s ebbs and flows.”

This includes tracking industry production and exports, among other economic indicators, Glas noted. Textile exports in the year through July were down 1.07 percent, but at the same time, those exports to the Western Hemisphere, which account for 70 percent of all shipments, rose 0.85 percent.

“This industry plays very close attention at what is happening worldwide, what are the economic trends across the United States, across other industries, what are energy prices looking like–there’s a multitude of factors that will determine if the United States is going to experience a downturn,” Glas said.

“And I think right now we don’t have enough information to make a determination because some of our statistics have shown significant growth in our industry,” she said. “Our exports have increased to this hemisphere by 6 percent in the last few years, so that’s a significantly positive trend. So even if there is some economic softness right now that our industry and others are experiencing, we’re still seeing growth in this export-dominant market.”

Glas said the tariffs on Chinese imports, which NCTO generally supports, has caused concern among some textile companies that it could affect their competitiveness. For example, rayon staple fiber and textile machinery are on the punitive tariff list and are not made in the U.S.

“So if you increase the cost of U.S. manufacturers’ ability to compete and reinvest in their mills, what does it mean for their ability to compete globally?” Glas asked.

She feels companies are looking to source close to home due to the desire for speed to market and with consumers more attuned to how and where a product is made. Given that trend couple with the ongoing trade uncertainty with China, Glas said, “We should be strengthening the Western Hemisphere in this supply chain. That’s the intent of the [Central American] Free Trade Agreement.”

She acknowledged that all businesses need to operate on some level of certainty to make investments and plan their business, even though NCTO supports President Trump’s policy of imposing tariffs on China as punishment for its trade policies.

“Everyone would like to see this resolved, but it has to be in a way that helps this industry and so many others that are impacted by unfair trade practices,” Glas added.

Separately, David Parkes, president of the Concept III fabric sales company, said, “We’ve seen dramatic changes over the years because of economic factors. To my mind, I don’t think we will necessarily fare any better than previous occasions.”

Parkes, whose 30-year-old company has survived several recessions, said, “If you’re marketing your product well and you have your supply chain in order, you have the foundation to at least cope with a downturn. If those things are not in place, then you are relying on price, and when that happens, it’s a downhill spiral.”

Chinese mills have also reported taking a hit from the trade war, forcing them to look elsewhere for export growth as U.S. sales have slumped.

IHS’s report noted that in China, July and August data points to a further loss of economic momentum. China’s exports fell 1 percent year to year through August, as exports to the U.S plummeted 16 percent. Imports also declined, a sign of weakness in domestic demand, the report said.

“The new and increased U.S. tariffs on Chinese exports will shave China’s near-term real GDP growth by around 0.2 percentage points,” the economists said. “China’s real GDP growth is projected to slow from 6.6 percent in 2018 to 6.2 percent this year, 5.7 percent in 2020 and 5.6 percent in 2021.”

Jun Fang, president of Chinese mill Seazon, said, “The trade disputes and tariffs have created a lot of uncertainties in the denim market. As one of the major players in the U.S., we have started to see a lot of inquiries regarding lead time of fabrics shipping to various Asian countries that are not affected by the new tariffs.”

The outlook

Some form of recession is on the horizon, Parkes said, but “I would not expect it to be a deep recession because the country is still strong economically.”

“We will see an adjustment, but I don’t think it will be severe,” he added. “If I did, I would be looking to cut expenses and overhead, and I’m not looking to do any of that at this point.”

The IHS economists said the new tariffs set for October and December “are expected to boost consumer prices and the cost of capital, softening the outlook for personal consumption expenditures, business fixed investment and GDP.”

With all of the economic indicators analyzed and forecasts made, Adams added, “The trade war is the wild card in all of this. If the tariffs come through as scheduled, that’s going to eventually hit consumers at the checkout line and higher consumer prices will probably result in a slowdown in consumer spending.”