US Monetary Policy Report hints at a recovery amid risks

Signs of improvement

The report highlights three sections of the US economy that have seen remarkable development even in the light of the surrounding pessimism. The labour market, inflation, and consumer sentiment have seen a significant development in the year 2023. As a result, the GDP figures also had a surprising increase of 3.1 per cent. The labour market in the US has begun to loosen somewhat, yet the total number of available employment opportunities still exceeds the available labour force. The unemployment rates are low with the real wages increasing, which points towards the start of a virtuous cycle if the policies aim to maintain a balance between growth, inflation, and unemployment.

Understanding the fundamental relationship between consumer sentiment and the economy underscores the certainty that, despite lingering risks, global and US growth will progressively strengthen. Much credit for this optimistic trajectory is owed to the US Federal Reserve System (FRS), which has diligently maintained interest rates as a key strategy to curb inflation. This approach has led to a decrease in lending activity and a corresponding reduction in demand for debt, effectively contributing to the moderation of inflationary pressures.

The efficacy of the monetary policy in controlling inflation is evident in the latest data, with the Private Consumption Expenditure Index (PECI) standing at 2.4 per cent, down from 3 per cent in October 2023. The prudent decision to raise interest rates and sustain them has yielded constructive outcomes for the US economy. This is evidenced by robust GDP figures, an uptick in consumer spending, and the potential for a revitalised manufacturing sector.

Optimism above all

The US economy has been improving and it has been reflected in the GDP and another important indicator, i.e., the consumer sentiment. For a policy to be effective or economy or any sector to experience growth, consumer expectations also play a role as it can increase or decrease the expenses on behalf of the consumer. The Consumer Sentiment survey revealed an improvement in consumer sentiment, which tells a lot about the US economy in the foreseeable short term.

Figure 1: Consumer Sentiment in US

Source: Consumer Sentiment Survey, University of Michigan

The consumer sentiment, which was way too low in the year 2022, has seen some improvement and a further boost in January 2024. The index for January 2024 reveals a positive outlook for the US economy as it will be reflected in terms of higher consumer spending.

Figure 2: Personal consumption expenditures (in $Mn)

Source: US Bureau of Economic Analysis (BEA)

Although the consumers are uncertain about the economy and its trajectory, the report revealed an increase in household consumption expenditure, with the expenses in the automobile sector being the highest. The overall increase in the expenses of the households comes on the backdrop of the eased expectations for inflation and a reduction in the prices of both durable and non-durable goods. This reveals a good year ahead for the economy and the manufacturing sector of the economy. The second half of the year 2023 saw higher consumer spending which is revealed in Figure 2, which is also a reason for a robust growth in the GDP figures.

As consumers increase their spending, discretionary spending also increases. All kinds of discretionary spending majorly fall under the durables. And the increasing consumer spending in all other categories apart from the necessities point towards a robust recovery for the US economy in 2024.

What is in store for textiles

The US is a major importer of apparel and textiles and therefore, consumer sentiment along with consumer expenditure plays a major role. In the year 2023, the private consumption expenses for clothing and footwear fluctuated due to reasons like increasing inflation and an uncertain policy environment regarding the economy, followed by the risk of slowing down of the US economy. However, in the second half of 2023, the entire economic scenario started to stabilise with a growth in real wages and a fall in the prices of all the goods. Figure 3 shows a rebound in the private expenditure in clothing and footwear, thus also indicating that the US may import more T&A products in the year 2024, giving a boost to the manufacturing sector in the supplying countries in Asia.

Figure 3: Private expenditure on Clothing and Footwear (in $Mn)

Source: US Bureau of Economic Analysis (BEA)

The upward trend in expenditure extends to both women’s and men’s clothing, propelled by real wage growth, heightened employment rates, and a surge in job opportunities. This buoyant consumer sentiment in the US is expected to drive demand back to pre-pandemic levels. With restored economic confidence and spending gradually reverting to its former patterns, the apparel trade is poised for growth. The heightened consumption expenditure signals an uptick in demand for the retail sector, thus stimulating increased supply and fostering expanded trade prospects in the foreseeable future.

In December 2023, the US imported apparel valued at approximately $5.72 billion, marking a notable 5 per cent increase from November. Concurrently, exports from the US also experienced a surge during the latter half of 2023. It is evident that consumer demand, GDP performance, economic health, and trade intricately intertwine. The current situation in the US serves as a testament to this interconnection.

The year ahead

With the economy steadily improving and reinforced by robust consumer support and effective measures to contain inflation, the outlook for US economic growth in the remaining months of 2024 is highly promising. This growth trajectory is expected to catalyse a flourishing trade environment, driven by the anticipated surge in retail sales across the nation. Although there are speculations regarding an interest rate cut by May, the inflation will reveal the actual scenario of the US economy and the monetary policy.

ALCHEMPro News Desk (KL)