Here is my process for making this little toddler dress from a t-shirt:
1 t-shirt (mine was an adult small and still had to take it way in)
Regular matching thread
Now when sewing sheering I don't really push or pull the fabric much. It seems to flatten out just as it is being pulled under the presser foot. I also have never taken the time to calculate how much the sheering pulls in the fabric, but I don't know if that matters too much. It is very stretchy stuff.
I sewed until I had about 3 or 4 inches of sheering down the top of the dress. Then I added a little rosette and ribbon to be tied like a halter top. I cut 2 ribbons and sewed one end of each to the inside front top of the dress. I did not hem the bottom of the dress because I don't think that it will fray...it might roll a bit though. I also cut it shorter than how long the t-shirt was, I read somewhere that from the armpit to the bottom of a 2T dress is about 17 inches? So that is what I cut it at.