Market Update August 2017
Economic growth reached an annualized rate of 3 percent during the second quarter, the first time it hit that mark in more than two years, according to the Bureau of Economic Analysis (BEA).
The BEA had estimated in July that gross domestic product (GDP) grew by 2.6 percent, but the agency revised that estimate upward in August, largely because increases in consumer spending and nonresidential fixed investment were higher than it had initially calculated. Growth during the first quarter was just 1.2 percent.
“The acceleration in real GDP in the second quarter primarily reflected upturns in private inventory investment and federal government spending and an acceleration in [personal consumption expenditures] that were partly offset by downturns in residential fixed investment and state and local government spending and a deceleration in exports,” the BEA stated.
Consumer spending, which accounts for about 70 percent of the nation’s economic activity, expanded by 3.3 percent during the second quarter, well above the 1.9 percent of the first quarter and the largest growth in a year. Purchases of durable goods, in particular, recorded a major turnaround, going from a 0.1 percent contraction from January to March to 8.9 percent growth from April to June.
The good feelings about the GDP announcement may have been somewhat tempered a few days later when the Bureau of Labor Statistics reported that job creation in August was lower than had been expected at 156,000 jobs. This bumped up the unemployment rate a tenth of a point to 4.4 percent. Wage growth remained mediocre, with hourly earnings increasing just 0.1 percent from July to August and 2.5 percent from August 2016 to August 2017.
The Federal Reserve Federal Open Market Committee is scheduled to meet Sept. 19-20. The Fed has raised interest rates twice in 2017 – most recently in June – and at least one more hike is expected this year.
Fed Chairman Janet Yellen made news in August when she praised the stricter financial regulations that were implemented by the Dodd-Frank Act following the Great Recession.
“The events of the crisis demanded action, needed reforms were implemented, and these reforms have made the system safer,” Yellen said. She added, “Any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years.”
Given the negative view that President Trump – and congressional Republicans – have regarding Dodd-Frank, Yellen’s speech may have significantly lessened her chances of being reappointed as chairman when her term expires in February. This could increase the odds of Gary Cohn, the director of the National Economic Council, being selected for the post, though Cohn reportedly angered Trump by obliquely criticizing the president’s controversial remarks following the violent clashes in Charlottesville.
Not surprisingly, given the growth in consumer spending, The Conference Board’s Consumer Confidence Index remained high, increasing nearly 3 points from July to August to 122.9. (The index’s baseline is 100 in 1985.)
“Consumers’ short-term expectations were relatively flat, though still optimistic, suggesting that they do not anticipate an acceleration in the pace of economic activity in the months ahead,” the Board’s director of economic indicators said.
The University of Michigan’s Index of Consumer Sentiment recorded a 3.6-point monthly increase in August to 96.8, 7 points higher than in August 2016. University researchers noted that the index “has been higher during the first eight months of 2017 than in any year since 2000, which was the peak year of the longest expansion in U.S. history.”
“The renewed strength in 2017 was mainly due to consumers’ favorable assessments of their own financial situations,” researchers stated. “Lows in unemployment, inflation, and interest rates, as well as renewed gains in the value of their homes and stock portfolios, pushed personal financial evaluations to near all-time peaks.”
Optimism also improved in the business sector in August, with the Institute for Supply Management’s Purchasing Managers Index rising 2.5 points to 58.8. (Any result over 50 indicates expansion in the manufacturing sector.) The survey of supply executives found 14 of 18 manufacturing industries reporting growth.
“Comments from the panel reflect expanding business conditions, with new orders, production, employment, backlog and exports all growing in August, as well as supplier deliveries slowing (improving) and inventories increasing during the period,” the Institute stated.
Conditions appear to be not quite as good in the housing sector, though, with housing starts in July 4.8 percent below the June level and 5.6 percent below July 2016, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales dipped 1.3 percent from July to August, largely because of declines in the northeast and the Midwest, the National Association of Realtors reported.
“Buyer interest in most of the country has held up strongly this summer and homes are selling fast, but the negative effect of not enough inventory to choose from and its pressure on overall affordability put the brakes on what should’ve been a higher sales pace,” the association’s chief economist said.
Car sales in August were 8.5 percent lower than they were a year earlier, and year-to-date car sales were down 11.3 percent compared to 2016. Light truck sales, however, recovered from a rare decline in July to grow by 2.4 percent in August. Through the first eight months of the year, truck sales increased 3.3 percent.
The Dow Jones Industrial Average reached a record high of 22,118.42 on Aug. 7, but closed the month at 21,948.10. The S&P 500 Index also set a record on Aug. 7 – 2,480.91 – but it gave back some gains and ended the month at 2,471.65.
The dollar held most of its value during the month, and at the end of August, was trading at 0.84 euros, 0.78 pounds, 110.7 yen and 6.59 yuan.
President Reagan famously said, “Government is not the solution to our problem. Government is the problem.” If the recent positive economic trends wither during the closing months of 2017, it will likely be because of the government. Legislators are creating uncertainty – which is toxic for business investment and economic growth – with a budgeting process that ignores deadlines, brinkmanship over a possible government shutdown, and a lack of seriousness regarding the debt ceiling and the potential for a government default. Tax reform, which once seemed likely with Republicans controlling Congress and the White House, may get crowded out – much to the chagrin of the business world – simply because lawmakers have postponed so much of what they must do until the last few months of the year. The Federal Reserve observed in July that “economic activity has been rising moderately,” but the minutes of the Fed’s meeting that month recorded that, “several participants noted that uncertainty about the course of federal government policy, including in the areas of fiscal policy, trade, and health care, was tending to weigh down firms’ spending and hiring plans.” Add to this the Trump administration’s protectionist tendencies – though the eagerness to impose tariffs and quotas on steel imports seems, thankfully, to have diminished a bit recently – and the federal government becomes a clear and present danger to the country’s economic health. Members of the party of Reagan would surely agree with the Gipper that government is not the solution. But they need to try harder to stop being the problem.
Steel Shorts August 2017
Pipe and Tube Makers Back ‘Quotas and Tariffs’ in Letter to Trump
Leaders of 23 domestic pipe and tube manufacturers wrote to President Trump to urge him “to move forward quickly with effective relief under the Section 232 investigation on steel imports in order to ensure the safety of domestic supply of pipe and tube to the national defense and critical infrastructure of the United States.”
The Commerce Department is conducting a Section 232 investigation of the impact of steel imports on national security. The agency had been expected to complete the inquiry in June, but it is now unclear when it will submit its report.
Members of the Committee on Pipe & Tube Imports said in an Aug. 28 letter to Trump that foreign producers supply more than 60 percent of the nation’s pipe and tube products.
“The high and growing level of import penetration has come at the expense of U.S. producers who have seen their sales plummet and their profitability decimated, forcing them to idle capacity and reduce their workforce,” the letter stated. “If the U.S. industry producing pipe and tube shrinks further, it will put the U.S. economy and national defense at a strategic disadvantage due to an unhealthy, and perhaps unsustainable, dependence on foreign products. … We urge you [to] take immediate action under the provisions of U.S. law that allow you to intervene to ensure that domestic producers can meet the national security needs of our great country by imposing a combination of quotas and tariffs.”
CNBC described the committee as a 40-member organization that represents “companies that purchase steel from integrated manufacturers to make tubular products.” The companies that signed on to the letter included ArcelorMittal Tubular Products North America, Zekelman Industries, and Trinity Products.
Trump Rejected Steel Offer from China
President Trump reportedly rejected an offer by China to reduce steel overcapacity by 150 million metric tons by 2022.
Financial Times reported that China made the offer in July, but “Trump twice rejected the deal,” even though aides, including Commerce Secretary Wilbur Ross, recommended that he accept it.
“The president had, by then, decided that he wanted to do something much broader,” Financial Times quoted a “U.S. official” as saying.
The decision reportedly surprised and disappointed Ross. The White House declined to comment on the matter.
China is the world’s largest steel producer, and overproduction by that nation is blamed by the United States and other Western countries for saturating the market and driving down steel prices.
2nd Round of NAFTA Renegotiations Concludes
NAFTA negotiators “have found mutual agreement on many important issues,” according to the U.S. trade representative, but President Trump suggested that the United States still “may have to terminate.”
Both as a candidate and as president, Trump has bashed the North American Free Trade Agreement (NAFTA) as being unfair to the United States. Amid threats to withdraw from the pact, his administration initiated talks with Canada and Mexico to revise the deal.
The second round of renegotiation talks recently concluded with representatives of the three countries jointly announcing that, “Important progress was achieved in many disciplines and the Parties expect more in the coming weeks,” and with U.S. Trade Representative Robert Lighthizer’s comment about finding “mutual agreement.”
“The successful conclusion of these negotiations will update NAFTA through new rules that will generate important economic opportunities for all three countries, fostering further growth in the region for the benefit of the three NAFTA partners,” the negotiators stated.
A few days before those negotiations began, though, Trump reiterated his doubts about the agreement, tweeting on Aug. 27, “We are in the NAFTA (worst trade deal ever made) renegotiation process with Mexico & Canada. Both being very difficult, may have to terminate?”
One of the issues being discussed is the Trump administration’s effort to revise the agreement’s country of origin rules, especially in regard to the production of automobiles.
“Rules of origin, particularly on autos and auto parts, must require higher NAFTA content and substantial U.S. content,” Lighthizer said before the second round. “Country of origin should be verified, not ‘deemed.’”
The third round of negotiations is scheduled for Sept. 23-27.
Commerce Department Announces Preliminary Findings Against Imports from Italy, Turkey
The Department of Commerce on Aug. 28 announced affirmative preliminary determinations in countervailing duty investigations of carbon and alloy steel wire rod imports from Italy and Turkey.
Investigators determined that producers in those countries received subsidies of as much as 44.18 percent.
The agency noted that, “Enforcement of U.S. trade law is a prime focus of the Trump administration,” and that the number of antidumping and countervailing duty investigations conducted by the Commerce Department through the first eight months of the year was 27 percent higher than the total during the same period in 2016.
The Commerce Department is expected to announce its final determinations in the cases by Nov. 9. If those determinations are positive, the International Trade Commission will then determine if domestic manufacturers suffered material injury as a result of the subsidies.
Customs Announces First Final Determination in EAPA AD Duty Evasion Case
U.S. Customs and Border Protection (CBP or Customs) announced the first Final Determination in an antidumping duty evasion case brought under the Enforce and Protect Act (EAPA) of 2016 on August 14, 2017. CBP found that Eastern Trading NY, Inc. had evaded antidumping duties on steel wire garment hangers produced in China and transshipped through Thailand. In addition to imposing AD cash deposits at the China –wide rate, live entry, and a higher continuous bond level, Customs also indicated that it would pursue additional enforcement actions such as initiating a 1592 penalty proceeding and/or referring the matter to ICE for civil and/or criminal investigation, as appropriate.
The decision provides insight into several aspects of CBP’s enforcement activities under EAPA. First, the importer claimed that it was an innocent victim of an evasion scheme, of which it had no knowledge and from which it did not profit. CBP noted that the statutory definition of evasion is limited to whether the cash deposits or bonds were insufficient, and the culpability of the parties does not matter (although it would for some of the other enforcement investigations). Second, cash deposits were applied at the highest available rate, even though the importer was able to show during the investigation that the goods might have come from a Chinese producer subject to a lower rate. Because the original entries did not claim that lower rate the goods cannot be tied to such specific producer. Third, documentation that might be required to demonstrate that an importer did not evade AD duties will often be more extensive than the records ordinarily required for entry filing. This may include company import policies and procedures, purchase and sales records, corporate structure, and detailed transaction documents, as well as information from the supplier on its facilities, manufacturing process, suppliers, workforce, source of raw materials, and relationship with other parties.
The primary basis for the Determination appears to be the lack of sufficient production facilities at the alleged supplier, the relationship of that supplier to a Chinese manufacturer, and Thai import records for wire hangers from that manufacturer to the Thailand firm, coupled with the lack of adequate production process and production records for the Thailand firm.
CBP also announced on August 17 Interim Measures in a consolidated investigation of eight importers of steel wire garment hangers from Malaysia, based on an allegation from the same U. S. producer involved in the Thailand case. Other pending EAPA investigations that have reached the Interim Measures stage involve diamond sawblades from China alleged to have been transshipped through Thailand, and wooden bedroom furniture from China alleged to have been produced by a high rate company but shipped by a company with a lower AD rate.
Importers of goods of the same class or kind as goods subject to AD and CVD Orders, whether buying from third countries or from exporters claiming favorable rates in the subject country, should exercise caution, investigate their suppliers thoroughly, and require substantial documentation supporting actual production by the claimed producer. Evasion requires no culpability, and the costs can be high. Caveat emptor!
Steven W. Baker
AIIS Customs Committee Chair