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WWD Year In Fashion issue 12/12/2011

Just as the world was seeing light at the end of the Great Recession, the storm clouds gathered again in 2011, leading to yet another dramatic and difficult year for the global economy. From debt crises in the U.S. and Europe and resultant stock market reverberations to historic price spikes in raw materials and rising labor and shipping costs, the fashion world, just like most commercial sectors, couldn’t catch a break.


This story first appeared in the December 12, 2011 issue of WWD. Subscribe Today.

In the broader view, the global debt crisis was felt from Athens and Milan to Capitol Hill and Wall Street, causing stock market jitters all year long, with wild swings in share indices that impacted business credit and consumer spending. Even as the year ticked toward its end, European leaders were meeting to try to agree on a financial package to rescue the euro, with heads of state warning the European Union was close to collapse. Then there were the supposed engines of China and Brazil, which stirred concerns for a variety of reasons.

In Washington, Republicans and Democrats were so polarized they couldn’t get a deal done over the summer to trim the bulging $15 trillion national debt, so they created a super committee to work out what the White House and Congress could not. Last month, that plan failed, and put in motion a supposed automatic 10 percent across-the-board budget cut to go into effect in 2013.

That rancor has been exacerbated by the beginning of the 2012 presidential elections campaign. There’s not a lot of talk about war or health care, but Democrats and Republicans each blame the other party for the fiscal and economic mess.

Some in the GOP field have taken up the mantle of flat taxes or a national sales tax as a way to improve the economy, to which mass market merchants balked, saying it’s bad for their lower- and middle-income shoppers. Those consumers have been skittish all year, with rising prices in other sectors like food, gas and heath care impacting their discretionary spending on apparel and other products. President Obama and congressional Democrats continued to push for doing away with the millionaire tax breaks instituted under President Bush, and even billionaire entrepreneur Warren Buffet said he wants to pay more taxes.

Across the Atlantic, Europeans were making the U.S. debt crisis seem not so bad, as countries such as Greece and Italy teetered on the verge of economic collapse. The crisis forced Prime Ministers Silvio Berlusconi of Italy and George Papandreou of Greece to resign.

A move last month by the Federal Reserve for an emergency extension of dollar liquidity to the European Central Banks calmed the troubled waters somewhat. On Friday, 26 of the 27 European Union leaders agreed to pursue tighter integration with stricter budget discipline in the single currency area, but Britain said it could not accept proposed EU treaty amendments after failing to secure concessions. Among the key agreements at the two-day summit led by French President Nicolas Sarkozy and German Chancellor Angela Merkel, considered the EU’s most stable economic powers, was for stricter enforcement of the EU’s basic law that says a budget deficit should not be bigger than 3 percent of gross domestic product.

The leaders are also trying to stave off a progression that could lead to a dissolution of the euro, even as Standard & Poor’s issued a warning last week that it might downgrade the credit rating of 15 EU nations, including euro pillars France and Germany.

In the run-up to next year’s French presidential elections, where the incumbent is in the hot seat for a range of issues, a CSA survey showed that employment was the top concern of voters in France, cited by 45 percent of those polled, followed by immigration at 10 percent.

Some of the world’s fastest-growing economies — China and Brazil — were not immune to the global economic malaise. While China’s economy grew 9.1 percent in the third quarter, outpacing expectations and signaling that the world’s second-largest economy can’t be counted out just yet, problems persist. The apparel manufacturing juggernaut has lost some market share, with Zhejiang and Guangdong provinces and the Pearl River Delta manufacturing centers seeing major factory closings.

Brazil’s economy failed to grow in the third quarter from the previous three months for the first time since the first quarter of 2009, as credit curbs, higher borrowing costs and budget cuts checked demand. The GDP grew 2.1 percent from the same period a year ago.

But Alessandra Ribeiro, an economist with São Paulo-based Tendências Consultoria, said Brazil’s picture is still bright. He told WWD last month that “a growing Brazilian middle class with more purchasing power tends to buy fashion, among other things, because it is a sign of status. This is why the Brazilian fashion market is growing and should continue to grow in 2012, as consumer spending remains stable.”

In the fashion community, everyone from mass merchants to luxury brands felt the pinch of higher raw materials costs, from cotton and wool to gold and silver.

The supply-and-demand ratio for cotton, spurred by economic malaise and natural disasters, saw prices reach their highest point since the Civil War at about $2.12 a pound in March. That put polyester back in vogue, but prices for the synthetic fiber had been inflated for some time by high petroleum costs — crude oil is up to $99.80 a barrel from $83.76 a year ago — while capacity had been curtailed over the years due to waning demand.

Cotton prices topped out in the spring before dropping back to about 89.5 cents a pound this month. J. Berrye Worsham, president and chief executive officer of Cotton Inc., noted that the rule of thumb is that a 50 percent increase in the cost of a fiber will result in a 3 percent cost bump at retail.

Polyester prices rose modestly in the last year, with staple currently selling at about 92 cents a pound compared to 85.5 cents a year ago; filament is 81 cents a pound versus 74 cents last year.

The spike in fuel and low demand has sunk profits for shippers, too. “There will be too many ships in the world and pressure on shipping rates for a long time,” said Ronald Widdows, chairman of the World Shipping Council. “We’re in the process of driving rates down, producing tremendous losses for companies…the result is an industry that lost $20 billion in the last year.”

While Australian wool supplies are likely to rise by about 3 percent, falling production by competing supplier nations means that global supplies will remain tight, according to Australian Wool Innovation, the marketing and research organization for Australian wool growers. Wool sells for about $5 a pound today compared to $4.12 a year ago.

The luxury goods sector, while more protected on the consumer side, has also felt the pinch of high producer prices. Gold has been selling at record highs for some time and it is currently trading at $1,711.30 an ounce, about 20 percent higher than a year ago, when it was about $1,390 an ounce. There’s been talk about $2,000-an-ounce gold among experts. Many jewelers turned to silver in the last few years as an alternative, but that metal has also been on the rise, currently selling at $32.23 an ounce from about $28.50 a year ago.

All these rising prices caught up with retail prices this fall. The Consumer Price Index showed retail apparel prices rising 0.4 percent in October from September and 4.2 percent from a year earlier.

Retail apparel prices have not been this high on a year-over-year basis since November 1991, according to Scott Hoyt, director of consumer economics at Moody’s Analytics. “The good news is cotton prices are coming down, so the end is in sight,” he said. But the decline probably won’t be felt until next year and economists said the retail apparel price increases wouldn’t necessarily improve profitability because of tepid demand and aren’t enough to balance cost increases.

All this impacted the stock market and consumer confidence worldwide. In the U.S., stocks fluctuated dramatically this year, reacting to seemingly every shred of economic data. The Dow Jones Industrial Average ended 2010 at 11,569.33. As of Friday, it stood at 12,184.26 after a seesaw year.

As the year drew to a close, there were some signs of improvement, at least in the U.S. IHS Global Insight chief U.S. economist Nigel Gault said, “The U.S. economy continues to show improvement even as the picture for the rest of the world deteriorates.”

He noted that third-quarter GDP growth was revised down to 2 percent because inventories fell, but said that situation would support future production growth in order to keep pace with sales. IHS has upgraded its fourth-quarter growth forecast to 2.6 percent from 2 percent. As 2011 turns the corner, the presidential election looms and more gridlock is expected from Washington. But economists and historians often say an election year is good for the economy, as political skies clear, confidence grows and spending increases.

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