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Business & Financial

Assessing The Washington Impasse

Robert S. Reichard, Economics Editor

Calling the near-term trend is becoming a little more difficult — primarily because of continued political infighting on taxes, spending and the budget deficit. But the result of all this isn't likely to be nearly as disastrous as some have been suggesting. For one, it will take several months for the so-called sequester effect to filter through the economy. Moreover, some kind of Congressional action is still a good bet — either by reaching some sort of modest compromise or kicking any meaningful decisions further on down the road. Moreover, some important sectors of the economy — including Social Security, Medicaid and anti-poverty initiatives such as food stamps — are not being affected. And the big Medicare program is being reduced by only about 2 percent. Upshot: Most forecasters now anticipate only about a one-half percentage point slowdown in 2013 gross domestic product (GDP) growth, to 2 percent, if current haggling continues into summer or fall. That, however, isn't that much different from 2012's advance.

Still other factors leading to the feeling that the Unites States is not about to fall off the cliff would have to include continuing consumer optimism and spending; an upbeat stock market, which is helping replenish the nation's overall net worth; and an improving housing market, which is having a similar positive impact. Indeed, according to one estimate, increases in equity and home prices together could boost GDP by about 0.7 percent — enough to offset the projected 0.5-percent hit from the Washington sequester. Finally, don't forget today's continuing strong profit trend. It's leaving a lot of money in corporate hands for investment once today's uncertainties diminish.

More On Industry Profits
And on an even more upbeat note, this profit trend should be especially positive when it comes to the United States' textile and apparel industries. Indeed, new detailed estimates provided to Textile World by economic consulting firm Global Insight show that 2013 profit increases in these industries are likely to run impressively above last year's levels. In the case of basic textiles like yarns and fabrics, the projected 2013 earnings jump is now put at somewhere near 70 percent — far above the more modest advances of last year. And the expected gain for more highly fabricated textile products like carpets and home furnishings is put at an even larger 85 percent. To be sure, improvement in the competitive apparel sector is expected to be somewhat more modest. But here, too, earnings totals should be considerably above those reported in 2012, when the industry just barely managed to break even. Go further out into 2014, and earnings in all these sectors of the U.S. textile/apparel complex should continue to inch up. Meantime, these Global Insight numbers would also seem to suggest equally strong gains in profit margins. More about industry margins soon, when Uncle Sam releases new numbers that carry through the fourth quarter 2012.


Behind The Improvement
Another year of fairly firm demand is, of course, one of the key factors behind these expected profit gains. But equally important is the absence of any cost pressure. On the fiber front, for example, man-made quotes remain essentially unchanged. And one global research firm notes that its weighted package of acrylics, nylon, polyester and polypropylene has actually been edging lower. To be sure, cotton quotes have recently moved higher. Even so, tags here are still not all that much above early 2012 levels.


Moreover, there's now growing evidence that some price declines could soon be in the offing as supplies begin to build up. Supporting this view are new U.S. Department of Agriculture estimates that put the bellwether global stock/usage ratio at 77 percent by the end of the 2012-13 marketing year. That's far above the 39-percent reading of just three years earlier. And the same kind of "increasing supply" scenario is projected for the United States viewed separately, with this key ratio here also expected to double compared to a few years ago. Note, too, that there should not be any upward pressure on labor, the industry's other big cost component. Latest numbers here show hourly wage rates running only 1-percent above a year ago. This is smaller than currently estimated productivity gains, thus suggesting that unit labor costs may also be edging down. Given all the above, 2013's combined material and labor outlays on the mill level should eat up only 71 percent of the sales dollar — far less than the 88-percent share noted only two years ago. Upshot: a lot of room for profit and margin improvement.

April 2013

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