November 2018 Market Update
The U.S. economy has now posted back-to-back quarters of at least 3 percent growth for only the fifth time in the past 13 years.
Gross domestic product (GDP) expanded by 3.5 percent in the third quarter, according to the Bureau of Economic Analysis (BEA), following 4.2 percent growth in Q2. The most recent consecutive quarters of 3 percent growth were during the first half of 2015.
A strong fourth quarter – which will depend in large part on the strength of the holiday shopping season – could result in growth for the year surpassing 3 percent for the first time since 2005.
The unemployment rate in October remained at a nearly half-century low of 3.7 percent as the economy added 250,000 jobs, which was much more than had been expected, according to the Bureau of Labor Statistics. Wages increased by a solid 3.1 percent.
“Nobody’s hot like we are,” President Donald Trump said of the U.S. economy as compared to the rest of the world.
Even with healthy growth, inflation has remained low, with the BEA’s personal consumption expenditures price index increasing by just 1.6 percent during the third quarter, a half-point drop from Q2.
“We really do feel like we’re in that Goldilocks moment where we’re getting good GDP growth, but we don’t have the inflation that you traditionally might have seen with this type of market,” Office of Management and Budget Director Mick Mulvaney said on Bloomberg Television.
A higher inflation rate would likely pressure the Federal Reserve to raise interest rates more quickly, but the 2 to 2.25 percent target range for the federal funds rate was left unchanged by the Fed at its Nov. 7-8 meeting, even as members of the Federal Open Market Committee noted that “economic activity has been rising at a strong rate.” Another rate hike is expected in December, though, which will be to the chagrin of Trump, who told Fox Business that the Federal Reserve is his “biggest threat” because it “is raising rates too fast, and it’s too independent.”
But Fed Chairman Jerome Powell, who was appointed by Trump, said in November that not only is he “very happy about the state of the economy now,” but that the central bank’s monetary policy “is part of the reason why our economy is in such a good place right now.”
Consumer spending, which accounts for about 70 percent of economic growth, grew by a robust 4 percent during Q3. However, nonresidential business investment rose by just 0.8 percent, the slowest rate since 2016 and a nearly 8 percent plummet from the previous three months. This has led to some questions about the long-term impact of the recent tax reform legislation, which included a significant corporate tax cut.
“You really lean back in your chair and wonder whether this enormous tax cut that was given to corporations only lasted three months,” an economist at Deutsche Bank told The New York Times. “The economics textbook would say that if you give a tax cut that lasts several years, you should see the effects for several years.”
Goldman Sachs in November predicted that “a fading fiscal stimulus” and higher interest rates will slow growth in 2019. The firm forecast quarterly growth of 2.5 percent. 2.2 percent, 1.8 percent and 1.6 percent next year.
Although Goldman does not foresee a recession anytime soon, some observers expect that a period of negative growth is not far away. Former Treasury Secretary Larry Summers, for example, estimated on CNBC in November that there is a 50 percent chance of a recession occurring during the next two years.
Confidence in the manufacturing sector remains solid, though it may be slipping some. The Institute for Supply Management’s Purchasing Managers Index came in at 57.7 in October, a more than 2-point drop from September and the second-lowest rating of the year. Of 18 industries surveyed for the index, 13 reported growth.
As reflected in the consumer spending data, consumer confidence remains high. The Conference Board’s Consumer Confidence Index increased 2.6 points to 137.9 in October, the highest level in more than 18 years. The Conference Board’s senior director of economic indicators sees the survey data as “suggesting that consumers do not foresee the economy losing steam anytime soon. Rather, they expect the strong pace of growth to carry over into early 2019.”
Housing starts inched up 1.5 percent from September to October, but were down 2.9 percent compared to a year earlier, according to the Census Bureau and the Department of Housing and Urban Development, while existing home sales fell 3.4 percent from August to September, the National Association of Realtors reported. The association’s chief economist attributed the decline to rising interest rates and market conditions in which “affordable home listings remain low.” The tight supply continued to push up prices, with the median price for an existing home in September increasing 4.2 percent from September 2017 to $258,100.
The Dow Jones Industrial Average ended October at 25,115.76, a little over 1 percent higher than where it started the year. The S&P 500 Index closed at 2,711.74 on Oct. 31 for a year-to-date gain of 0.6 percent.
The dollar closed October trading at 0.88 euros, 0.78 pounds, 112.89 yen and 6.98 yuan.
The conventional wisdom is that people vote their pocketbooks. Yet with the economy the strongest it has been in more than a decade, the Dow Jones up by more than a third in the past two years and unemployment at a 49-year low, voters on Nov. 6 delivered to Republicans their worst midterm losses since the post-Watergate elections of 1974. In fact, although Democrats suffered bigger losses in 1994 and 2010, an analyst at J.P. Morgan concluded that, after adjusting for economic conditions and asset prices, the GOP’s midterm performance this year was the worst by a party in power in a century. “Based on the hand the GOP started with, they should probably have been able to retain the House,” the analyst said. “Sometimes, however, money can’t buy you love.” Such is the nature of the Trump presidency. The man who gold-plated nearly everything that bears his name other than Ivanka may profess to have the Midas touch, but, if so, he also possesses the uncanny ability to make half of the country uninterested in that precious metal. While Trump can take some credit for recent pro-business moves – cutting taxes and reducing regulations, chief among them – the divisiveness and controversies that have been inextricable from his administration have costs. The economy and the stock market might be even stronger today if he had adopted a more standard (and Twitter-free) approach after being sworn into office. His party almost certainly would be.
November Steel Shorts
Steel Tariffs Lead to Higher Profits But Few New Jobs: Reuters
The Trump administration’s 25 percent tariffs on steel imports are unlikely to produce many new jobs and are mostly benefitting “the already strong bottom lines” of American steel manufacturers, Reuters reported in November.
Reuters noted that, while the Commerce Department provided it with a list of 3,405 jobs created by 13 steel projects, 1,400 of those jobs are at projects that “were planned before tariffs or do not rely on them” and nearly 700 more are at projects that “are not certain to go forward.”
While some domestic companies may expand operations to meet additional demand created by tariffs, that is not likely to result in significant job growth, Reuters reported, because manufacturers have increased plant efficiency to the point that a ton of steel that required 10 people to produce in 1980 now requires only two people.
The news organization added that earnings for companies in the S&P 500 Steel Index increased by 75 percent during the first half of 2018 and are expected to grow by 166 percent during the second half of the year.
Steel Price Spread Between U.S., Other Nations Swells Following Tariffs: Report
Since President Donald Trump announced in February that his administration would impose 25 percent tariffs on steel imports, steel prices in the United States have increased by 11 percent, while prices in five competing countries have fallen by 4.8 percent, according to an October report from Business Forward.
The steel price spread between the United States and the five other nations is now 1.8 times larger than it was before the tariff announcement, and “comparatively higher steel prices are having a disproportionate impact on manufacturers that export, and those manufacturers are the ones America needs most,” the organization stated.
“Putting steelmakers ahead of manufacturers is backfiring,” Business Forward President Jim Doyle said. “Companies that buy steel employ 46 times more workers across the U.S. than companies that produce steel.”
The price of hot-rolled steel has increased 13.5 percent in the United States while falling by 4.6 percent in China, Germany, Italy, Japan and the United Kingdom, the group found. For cold-rolled steel, the price has increased 8.9 percent domestically while dropping by 4.9 percent in the other five countries.
Mexico Anticipates End of Steel Tariffs with New Trade Pact
Mexico reportedly expects steel tariffs to be lifted when the deal to replace NAFTA is signed in the coming weeks.
The United States, Canada and Mexico recently completed negotiations to replace the North American Free Trade Agreement, but the pact does not address the 25 percent steel tariffs that the Trump administration imposed this year. The tariffs, which were implemented in the name of national security, are a sore spot for the two close allies and major trading partners of the United States.
“It is the expectation that, by the time of the signing, there will be either a solution or a very clear track that gives enough certainty to all parties that a solution is coming,” Mexican Ambassador to the United States Gerónimo Gutiérrez said.
The signing of what is being called the United States-Mexico-Canada Agreement (USMCA) could take place at the G20 Summit, which is being held Nov. 30-Dec. 1 in Buenos Aires.
It is unclear if Canada has the same expectation as Mexico regarding the tariffs.
Commerce Department, ITC Announce Trade Determinations
The Department of Commerce in October announced affirmative final determinations in antidumping duty investigations of imports of forged steel fittings from China and Italy and a countervailing duty investigation of such imports from China.
The dumping margins were said to range from 8 to 142.72 percent for China and from 49.43 to 80.2 percent for Italy. The subsidy rate for China was found to be 13.41 percent.
Imports of forged steel fittings in 2017 totaled $104.8 million from China and $43.9 million from Italy.
The petitioners in the cases were Bonney Forge Corporation and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union.
Separately, the U.S. International Trade Commission in October decided against revoking antidumping duty orders on imports of steel concrete reinforcing bar from Belarus, China, Indonesia, Latvia, Moldova, Poland and Ukraine.
International trade agreements that require a five-year review process for such orders led to the reconsideration, but the commission found that revoking the orders “would be likely to lead to continuation or recurrence of material injury within a reasonably foreseeable time.”
The USMCA Changes the Preference Rules for Many Products of HTS Chapter 73
The United States – Mexico- Canada (USMCA) Free Trade Agreement, scheduled pending ratification by all three countries to supersede NAFTA on January 1, 2020, includes some significant changes in Rules of Origin. In addition to the well-publicized changes for automobiles and auto parts, there are new rules for certain steel products covered by HTS Chapter 73. Commodities affected include pipe and tube (other than seamless) (HTS 7305-7306), pipe fittings (7307), structures and parts of structures (7308), wire, rope, cable, barbed wire, cloth, grill, netting and fencing (7312-7314), chain (7315), nails (7317), and screws, bolts and nuts (7318).
The changes will limit the heading changes that would qualify a product for preferential treatment, and/or increase the Regional Value Content (RVC) required for that treatment. The changes will be phased in, depending on product either two years or three years after entry into force of the Agreement. This is intended to allow manufacturers time to modify procedures where desired or possible to retain preferential qualification. Current NAFTA rules will continue to apply until the phase in dates.
The primary changes will alter current rules which allow a change in classification from Chapter 72 articles to Chapter 73 articles to constitute sufficient processing for preference in all cases. For many products that tariff shift will no longer be sufficient unless at least 70% by weight of the inputs from specified provisions of Chapter 72 and 73 are considered originating products, or the required RVC amount (ranging from 50% to 75% depending on product and method of calculation) is met.
The new rules are very specific, changing from product to product both in the provisions covered by tariff shift rules and in the required RVC amounts. For example, the four six-digit headings in HTS 7308 (the only heading with a two year rather than three year phase in period) have similar but slightly differing rules, specifically regarding the required RVC content.
The rules changes are designed to increase the originating content level of the specified steel products by requiring higher amounts of originating products or increased regional value inputs. The use of RVC requirements is not new, and exists under the current NAFTA rules for several of the other products in chapter 73. The expansion of the RVC requirement to additional products, and the addition of the 70% by weight originating requirement as an alternative, will require producers seeking to qualify their goods for tariff preferences to undertake increased recordkeeping and accounting activities, and to be prepared to defend preference claims using those procedures.
The specific rules remain subject to legal review and authentication, and of course final ratification by the three governments. The new rules are contained in Annex 4-B to Chapter 4, Rules of Origin, of the Agreement. A preliminary version is available HERE
There are some significant changes in the administrative provisions covering origin. The NAFTA Certificate will no longer be required (but may be used); certifications of origin may be provided on invoices or other documents, and need only provide the required information without having a specified format. Importers may now provide certifications, so long as certain requirements are met. There are also some changes to de minimis levels, the methods for calculating RVC, accumulation, treatment of recoverable materials, and certain other requirements.
Steven W. Baker
AIIS Customs Committee Chair