Economy, Politics, Trade Policy and Shoe Market

US Economy, Politics and Trade. GDP growth topped 3% in both the second and third quarters of 2017, the first time in many years that two consecutive quarters of growth reached that level. Hiring remains strong and the unemployment rate fell to 4.1%, a level not seen since before the Great Recession of 2008. Optimism on the economy is just about universal.

• The perky economy and stock market all-time highs come without passage of the promised Trump tax, health care or infrastructure legislation.

• Trump’s reduction in regulations on business have been robust and have given business major relief and is likely an important factor underlining current business confidence.

• The outlook for continued strong growth is good and it could pick up even more if the Republican (GOP)controlled Congress can pull together and pass a major tax reform measure which among many other provisions lowers the corporate income tax to 20% from the current global high of 35%, as is proposed in the House bill, where passage is likely.

o Senate passage of a sweeping tax reform is less certain, as the GOP can only lose two of its 52 members and still pass the bill, a daunting challenge given the number of maverick GOP senators.

• Much is riding on the tax effort – Trump and the GOP need it to balance the health care reform debacle and the outcome could well determine if the GOP holds onto its control of both houses of Congress in the election next November.

• The GOP did poorly in the state elections just completed and many blame Trump’s bad behavior and GOP legislative failures for the setbacks.

o Trump’s approval rating is about 38%, the lowest rating of any president at this stage of his term.

• Trump’s Asia trip offers the opportunity to make progress on trade with China, North Korean nuclear and missile proliferation, as well as security and trade with Japan and others.

• On the trade front, many issues are coming to a head. How Trump deals with the issues will set the stage for how international commerce fares under his administration.

o Trump will shortly have to decide whether to restrict imports (mainly from China) of solar panels and washing machines, as well as steel and aluminum (again mostly from China).

o Trump’s meeting with China President Xi may well determine how these issues play out.

o China’s cooperation containing North Korea may well outweigh the trade agenda if it gets its neighbor across the Yalu River to make concessions; all eyes are on this critical summit.

o The NAFTA negotiations will almost certainly break down by year-end as Trump has laced the talks with ‘poison pills’ designed to blow up the talks.

 US demands are too extreme for Mexico or Canada to accept:

• a ‘sunset’ provision would require each party to reaffirm participation every 5 years,

• mandating that autos must have at least 50% US content to get the zero duty (no agreement ever has had any such national requirement) and

• abolition of the administrative adjudication panel under NAFTA to settle disputes.

 Look for Trump to withdraw the US from NAFTA, the terms of which provide a six-month period before regular national duties are imposed.

 With the termination, Trump would have the proverbial ‘gun to the head’ for Mexico and Canada, both of which need NAFTA more than the US.

• No doubt Trump would make a spirited effort to get Mexico and Canada (probably in bilateral talks) to make final deals, probably in the summer of next year.

 One on one talks are the way Trump wants to negotiate; he believes that this mode gives the US maximum leverage and ensures the best deal for the US.

 But in the end, no one knows how this mercurial president will handle this – or just about anything!

US Footwear Sourcing Update

Total Footwear Imports. US shoe imports in the first three quarters of 2017, managed only a 1.5% increase in pairs. While this is an improvement over the decline of 2.4% in the first quarter of this year and better than the decline of 7.2% recorded for the first three quarters of 2016, the US shoe market is stuck at the diminished level of 2016 – recording virtually no growth in the last two years, despite a strong overall US economy.

• There is marked weakness in the sport shoe sector with leaders Footlocker, Nike and Under Armour flat or declining in sales and the hoped for pick up in women’s fashion is barely emerging.

• While niche suppliers – Portugal, Ethiopia, and Burma – recorded double digit increases, only Vietnam with a 11.4% increase, among major suppliers, showed a strong performance.

• Nearly all other major suppliers, including China, basically held steady during the first three quarters of the year in their pairs shipments to the US, although the Dominican Republic and Brazil recorded double digit declines.

• Indeed, China’s market share in units fell only marginally to 72.1% from the 73.4% recorded for the first three quarters of 2016.

o After the sharp declines in market share in recent years, this flattening of its market position in the US must be viewed as a strong showing by the China shoe export business to the US.

[US Footwear Imports Jan-September 2017]

Leather Footwear. For the first nine months of 2017, US imports of leather shoes fell by 8.2% in pairs. This dismal performance is on top of the 7.5% decline reported for the first three quarters of 2016.

• The decline in leather shoe shipments is continuing especially in women’s fashion footwear.

o The weakness in this most important sector is due to the now entrenched casual/leisure life style that dominates the apparel and footwear markets.

o While the athleisure market is slowing a bit as is clear from the fall off in athletic shoe sales, it has notyet benefited the women’s leather fashion business in a meaningful way.

o Until there is a market move to more traditional women’s fashion styles, there is little likelihood of any meaningful pick up in leather shoe sales to the US.

Not surprisingly, imports fell from just about all major supply countries with the largest percentage declines in leather pairs reported for Dominican Republic (DR) (specialists in leather outdoor boots) and India,as well as Italy and Brazil (both women’s leather fashion leaders).

o For Asia, imports fell from China, Vietnam, Indonesia, Cambodia and with only Bangladesh (probably gaining leather work/outdoor boots moved from the DR), Burma and Thailand recording increases in the first nine months of the year.

o An increase was also recorded for Ethiopia where the three Chinese factory operators, who account for nearly allUS shoe importsfrom the east African country (leather women’s casual and dress styles), have all indicated plans to expand their production significantly.

o Overall, leather shoe import prices were flat for the first three quarters of 2017.

[US Leather Footwear Imports Jan-Sept 2017]

Overall Leather Goods Imports. The category on a value basis continues its decline, falling by 8.6% in the first three quarters of 2017. Again, this is on top of the 10.4% decline recorded for the like period in 2016.

o Apparel, shoes, gloves and finished leather all recorded declines in dollar imports into the US in the first three quarters of 2017.

o Because athleisure lifestyles continue to dominate men’s and women’s ensembles, there is little room for leather styles, although the ‘other’ category of leather imports which includes bags, belts, etc. recorded a 5.9% increase.

o China’s share of leather goods imports into the US (excluding finished leather, a market barely served by China) fell marginally to 49.3% from 50.5% from the same period in 2016; its biggest declines were in leather apparel (14.1%) and shoes (11.3%).

[US Imports of Leather Goods Jan-Sept 2017]

Peter T. Mangione, Global Footwear Partnerships LLC, Washington, DC, November 7, 2017, ptmangione@gmail.com, Copyright@Global Footwear Partnerships LLC. All rights reserved. No reproduction without written permission