US Economy

• US GDP growth for the third quarter of 2016 bounced up to 2.9%, following growth of 0.8% and 1.4% in the first two quarters.

• As usual in the US, consumer spending led the way, as sales of autos and houses maintained a strong pace; the drag on the economy is in the business sector where there is little new investment and sales overseas remain muted due to the poor growth in most markets around the globe.

• The outlook for the fourth quarter and the all-important holiday shopping season is not too robust, but most anticipate a reasonably normal buying pattern for year-end 2016.

GFP Worker Cost Survey 2016

• Overview. Several countries had large worker cost run-ups in 2016 at least in dollar terms including Ethiopia, Cambodia, DR, Brazil and Japan.

o Extreme dollar weakness in the last year in the latter two countries explains most of the sharply higher cost.

• China. Worker costs in China seem to have increased modestly for the year, reflecting government policy to restrain or not authorize annual minimum wage increases.

o This reverses a decades old policy of aggressively increasing minimum wages levels annually.

o It is believed that the new restraint is in response to the diminishing competitiveness of China’s export sector relative to its rivals especially ones like Vietnam where worker costs are much less.

o The survey includes reports from many manufacturers in China.

 Not surprisingly, there is a wide disparity in costs depending on location, amenities, competition for workers, etc.

 Worker costs are much lower in Putian, Fujian Provence, for example – well less than $2.00 per hour -- than in the heart of the Pearl River Delta area, near Guangzhou, Guangdong Provence, with the ubiquitous dormitory system and keen competition for workers from other sectors like electronics – more than $3.00 per hour.

 The pool of workers available for shoe factories continues to be tight.

• This is especially so in the Pearl River Delta area, which is dependent exclusively on migratory staff from the interior of China, from which the flow of workers has diminished drastically in recent years due to attractive employment opportunities in the interior and due to the smaller overall worker pool occasioned by the 1978 ‘one-child’ policy.

• Vietnam. Like China, worker cost increases have been generally modest for Vietnam during 2016.

o Unlike China, the government in Vietnam is now supporting incremental wage increases annually, somewhat of a reversal of long standing policy to keep wages in check to ensure competitiveness with China.

o Like China, there is a wide disparity in worker costs depending location in the country.

 In the HCMC (Saigon) area, worker costs vary from around $1.40 per hour to over $2.00 per hour.

 In the north, the disparity is even greater. It ranges from about $1.10 in the Hanoi area to around $0.60 in more rural areas of the north.

o While worker availability in the HCMC area is tight like China, there seems to be enough workers available in other areas in the country, which seems overall to have a more stable work force than the one in China that is facing multiple upheavals.

• Survey Methodology. The Global Footwear Partnerships LLC (GFP) annual worker cost survey aggregates data from shoe factories globally, including all costs to the factory for the worker – wages, social benefits, food, lodging, etc.—converts the local costs to dollars and divides the monthly total cost by the hours worked, arriving at a cost per hour in US dollars.

[Shoe Worker Cost Comparison 2016 table]

US Shoe Sourcing Update

• US Shoe Imports. They declined by 7.2% in pairs for the first three quarters of 2016 with nearly the entire decline coming from China.

o Importation of shoes from China fell by over 12%, declining by some 183.0 million pair in the period.

o Imports from countries other than China increased in the period by only 41 million pair, leaving some 142 million pair, lost by China and not picked up by other supply countries.

o Large percentage increases were recorded by Vietnam, Cambodia, India, Brazil and others.

 The increases from Vietnam and Cambodia are surely in the athleisure space likely replacing imports from China in both that space and in the women’s fashion area.

• US Leather Shoe Imports. On a percentage basis, imports of leather shoes fell more sharply than overall shoe imports.

o The importation of leather upper shoes was down over 11% in pairs for the first three quarters of 2016, 51.0 million pair less than was imported in the same period in 2015.

o The sharp decline reflects the continuing weakness in women’s fashion items, which are usually made of leather.

o All but a tiny portion of the decline was due to reduced imports of leather shoes from China.

 Its imports of leather shoes in pairs fell by 18.0%, dropping some 49.0 million during the period.

o There was no pickup by other countries of any of the decline from China in US imports of leather shoes during the period.

 Indeed, imports of leather shoes from other countries decreased by 2.0 million pair during the first three quarters of 2016.

 Most of the decline in imports of leather shoes from other than China was due to declines from Vietnam and Indonesia, and likely in the sports categories.

• Other countries that recorded declines in the importation of leather shoes were DR, Mexico, and Bangladesh, all of which specialize in outdoor product, another weak sector fighting the athleisure trend.

 By contrast, several leather shoe-producing countries increased their sales including India, Brazil, Italy, Spain, Portugal and Ethiopia, likely replacing some of the women’s leather fashion items that have moved out of China.

US Footwear Imports Jan-Sept 2016

US Leather Footwear Imports Jan-Sept 2016

US Imports of Leather Goods Continue to Decline – China Dominates Shoes, Apparel, Gloves and Bags But Less So than in the Past

• US leather imports in dollar terms fell sharply in the first three quarters of 2016 by 11.4%, representing a decline of $1,441.0 million.

o Footwear. Overall, leather shoe imports fell in dollar terms by 12.3% for the January through September period amounting to a decline of $1,213.0 million in imports of leather footwear. Those from China fell even more by 20.0% or some $1,079.0 million.

o Garments. Apparel declined, dropping 16.2% overall and China falling 22.0%.

o Gloves. Same with gloves: down 30.6% overall and China down 39.2%

o Bags and the like. Accessories did better falling only 0.3% but China declined by 12.8%.

Overall, China’s leather imports into the US in the first three quarters of 2016 fell by 20.4%, although its market share remained dominant at 43.8%. The decline represented a loss of some $1.3 billion in China leather sector sales to the US in the first three quarters of 2016.

• Finished leather imports, mostly from Mexico for the auto sector, also fell by 3.1% although China’s tiny share (2.7%) was up by a smart 13.1%.

[ US Imports of Leather Goods Jan-Sept2016]

EU Footwear Imports Decline in Half of 2016

• Overall, shoe imports into the 28 countries of the EU fell by 1.2% in pairs to 1,381.7 million pair in the January to June period 2016. Overall decline was 16.4 million pair from the first half of 2015.

o The entire decline was more than accounted for by China, down 4.0% or some 40.0 million pair less than in the same quarters of 2015.

o Small declines were also recorded from Indonesia, India, Tunisia, and Morocco.

o Increases came from Vietnam (albeit small), Brazil (mostly in famous injection brands, as well as some leather items), Turkey (also injection items mostly), Cambodia, and Bangladesh, among others.

• Like the US, the EU is importing far fewer leather shoes than in the past, likely reflecting a fascination with athleisure product as in the US.

o Imports of leather upper shoes fell by 6.5% in units in the first half of the year, while those items from China declined by 10.8% during the period.

• Imported prices were up but not by that much as the dollar has come off its highs against the euro.

o Average prices on shoes from China fell by 1.1%. Vietnam prices were up 5.1%.

o Price adjustments were modest from countries with currency tied more closely to the euro like Tunisia, Bosnia, etc.

[EU Footwear Imports Jan- June 2016]

Peter T. Mangione, Global Footwear Partnerships LLC, Washington, DC, November 5, 2016, ptmangione@gmail.com, Copyright@Global Footwear Partnerships LLC. All rights reserved. No reproduction without written permission