A
couple of weeks hardly make a trend. But now, for the first time in several years, the
industry seems to be showing some signs of a bottoming out. Mill shipments, for example, advanced 1
percent over the latest reported month — with shipments of mill products rising by an even bigger
percentage.

Equally encouraging has been the gradual paring of top-heavy inventories. Specifically,
another small decline in the textile mill stock/sales ratio dropped this key industry barometer to
1.61-months’ supply — modestly under the 1.66 reading of a year ago. And in the mill product area,
this key ratio dropped even more precipitously over this same period — from a 1.77-months’ supply
down to only a 1.52 reading.

To be sure, mill output has held steady rather than rising. But this figure, too, should
begin to inch up as the inventory drawdown is completed, and more of current final demand is met by
new mill production.

But Prices Continue To Disappoint

So far, however, there are few, if any, signs of any meaningful price firming. Indeed, all six
of the textile subgroups monitored monthly in our Textile Barometer table edged lower over the
latest reported month.

And if you zero in on the bellwether greige goods category, tags are down a significant 4.3
percent vis-à-vis a year earlier. Three factors behind this continuing price softness: still
relatively disappointing demand; excess capacity, with mill operating rates in the low 72-percent
range; and continuing strong import competition.

On the latter score, tags on incoming textile items dropped again, according to the latest
Bureau of Labor Statistics (BLS) tabulation, leaving them about 3 percent under levels prevailing
just a year ago. Moreover, given today’s strong U.S. dollar, this key import price advantage isn’t
likely to narrow anytime soon.

Few Problems On The Cost Front

On a somewhat rosier note, raw material prices (costs to the textile industry) could help offset
all this easiness in mill quotes. Man-made fibers, pressed by global overcapacity, are running
close to 5 percent under a year ago.

And while the decline in raw cotton tags has bottomed out, these quotes still remain close to
10 cents per pound under year-ago levels. Labor costs also continue to present few problems. The
hourly mill pay rate, for example, is running only 2.8 percent above last spring. That pretty much
matches the 3-percent-or-so annual efficiency gains that are now the norm.

All this could be why the industry, at least on an overall basis, has managed to get back
into the black. In the final three months of last year — the latest period available, mills —
despite lackluster demand and extremely competitive prices — were able to eke out a small 0.7-cent
profit on each dollar of sales. While hardly earthshaking, it’s a lot better than the red-ink
0.6-cent and 2.6-cent losses prevailing in the previous three months and the fourth quarter
2000.

A Firming Economy Could Help, Too

There are also increasing signs that improving economic conditions may also be contributing to
industry health. In any case, overall gross domestic product (GDP) growth over the next few
quarters is expected to average out near 3 percent annually. That compares to the relatively flat
pattern of late last year. Not surprisingly, consumer confidence is up sharply.

Moreover, buyers are putting their money where their mouths are — with overall retail sales
gains running at a 3- to 4-percent clip — enough to suggest some pickup in still-depressed apparel
areas. The continuing strong housing market could provide yet another fillip — sparking further
demand for floor coverings and other household furnishings.

Some New Thoughts On Trade

Another positive sign: last year’s 4-percent decline in the dollar value of textile imports. To
be sure, the drop was driven by lower demand rather than any easing off in competitive pressures.
Yet, it does mark the first decline in well over a decade.

As for this year and beyond, there’s renewed hope that the administration will be more
sympathetic to the industry’s problems. Washington, for example, has given Pakistan only one-third
of the trade concessions it had been seeking.

Equally significantly, the government has promised to look more carefully at textile and
apparel smuggling, step up pressure on other nations to lower trade barriers, resist the World
Trade Organization’s (WTO) efforts to speed up the global phase-out of textile and apparel quotas,
and reassess efforts to promote textile exports. The big question mark: will Washington follow
through on all these promises?

May 2002

E
arly second-quarter performance continues to disappoint. But on a rosier note, there are
also some signs of better days ahead — with meaningful signs possible by as early as summer or
fall, as the economy begins to pick up steam (see details below). One thing is for sure, given the
industry’s current financial problems — the improvement will come none too soon. It’s hard to shrug
off, for example, such recent news as Guilford Mills’ and Galey & Lord’s decisions to file for
Chapter 11 backruptcy court protection. Remember, too, these moves come hard on the heels of last
year, when some 124 domestic mills either laid off workers or closed down entirely.

Almost all of these steps can be traced back to a growing financial squeeze. If nothing else,
they highlight the need for relief — especially for passage of new legislation calling for longer
net-operating-loss carryback periods.

Financing Problems Persist

Further aggravating the financial situation is the industry’s inability to raise prices. Most
fabric quotes, for example, remain under year-earlier readings — some by significant amounts.

Behind all this softness: a combination of lackluster ordering, industry overcapacity
(operating rates are in the low 70s range) and the downstream pressure put on mills by both apparel
manufacturers and retailers. These buyers of mill products are themselves being squeezed by retail
apparel quotes that currently average some 4 percent under year-ago levels. And, last but not
least, there’s still strong import competition — with quotes on incoming textile and apparel
products off by about 1 percent vis-a-vis just one year ago.

An Improving Inventory Picture

But, as noted above, things could be getting a little better over the coming months. For one,
the industry’s top-heavy inventory position seems to be shrinking. These lower pipeline stocks make
it somewhat more likely that any new orders coming in will stimulate new production. The
improvement here is centered in the textile mill area (yarns and fabrics), where inventories have
dropped a solid $168 million over the latest reported month. This translates into a meaningful
decline in the bellwether stock/sales ratio — from a 1.69 months’ supply down to a 1.65 reading.

To be sure, the stock levels in textile products (carpets, rugs, home furnishings) remain
relatively unchanged. But that’s to be expected since both dollar levels and the stock/sales ratio
have been relatively low for quite some time now.

Another Plus: Faster Economic Growth

The drop in textile inventories reflects a more general inventory correction — one embracing the
entire economy. Credit this to savvy computer technology, which has provided managers with the
real-time information to quickly adjust production schedules to earlier increases in stock levels
and slower demand. Bottom line: businessmen were able to liquidate stockpiles at a peak rate last
year — with the fourth quarter alone showing a record $120 billion tumble.

Another economic fillip has come from extra-large tax refunds. Running better than 25 percent
above a year ago (and coming to more than $2,000 per taxpayer), they’ve helped to bolster consumer
spending.

Add in other pluses such as record mortgage refinancings, minimal price inflation and low
interest rates — and most economists are now more than doubling their first-half 2002
gross-domestic-product (GDP) gain estimates (from 1 to 2 percent to 3 to 4 percent). This, in turn,
is bound to have some positive impact on both textile and apparel demands.

What It All Adds Up To

Nor is this upwardly-revised GDP growth forecast the only good omen. Equally important are the
textile and apparel industries’ continuing efforts to market a growing number of improved and
innovative new products. Particularly noteworthy in this respect are just-introduced oven-baked
resin finishes for denims, new antimicrobial fabrics that kill bacteria and new cottons, wools,
man-mades and blends that appeal to upscale buyers.

In short, the worst seems over — though again, it should be emphasized that any big spurt is
still nowhere in sight. Our revised industry forecast for the last six months of the year, for
example, calls for a modest 1- to 2-percent increase in overall mill production totals — a welcome
change from the steady tattoo of 2001 textile declines.

April 2002