February 2019 Market Update
The Federal Reserve appears to be backing off its plan to continue to raise interest rates.
At least two increases to the target range for the federal funds rate had been expected this year, but following the Federal Open Market Committee’s Jan. 29-30 meeting, it was announced that, not only will the committee keep rates at 2.25 to 2.5 percent, it “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”
This was the first post-meeting statement since 2015 that did not convey the Fed’s intention to implement “further gradual increases” in interest rates. Since late 2015, the FOMC has raised rates nine times, most recently in December.
Despite this shift in monetary policy, the Fed did not express any wariness regarding a recession. It stated that “economic activity has been rising at a solid rate” and said that it “continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes.”
In February, Federal Reserve Chairman Jerome Powell rejected concerns that the possibility of a recession “is at all elevated.” He noted, though, that economic growth has been uneven across the country and “poverty remains a challenge in many rural communities.”
“Rural areas where traditional industries are declining and where new employers may be moving in often experience a mismatch between the skills of local workers and those demanded by the new employers,” Powell said.
While the Fed is not warning of a recession, some others see the potential for one. JP Morgan Chase CEO Jamie Dimon in January, for example, cautioned vaguely that “the range of [economic] possibilities is broader and the range of bad outcomes is increasing.”
“The U.S. economy is kind of like a ship,” Dimon said. “Then you have all this other noise, geopolitical noise, Brexit noise, what’s the Fed going to do … shutdown, trade. They’re kind of buoys in the water in front of that ship. Eventually that may very well cause a slowdown or a recession.”
Ray Dalio, co-CIO and co-chairman of Bridgewater Associates, said he sees a “significant risk” of recession next year.
“It’s going to be globally a slow up,” Dalio said. “It’s not just the United States; it’s Europe; and it’s China and Japan. … Where we are in the later [economic] cycle and the inability of central banks to ease as much, that’s the cauldron that will define 2019 and 2020.”
Analysts at Goldman Sachs, meanwhile, “don’t see a recession, but we do see a pretty sharp slowdown,” the firm’s chief global equity strategist, Peter Oppenheimer, said.
During the first three quarters of 2018, the economy grew at annualized rates of 2.2 percent, 4.2 percent and 3.4 percent, raising the possibility that a strong fourth quarter could result in the first year of 3 percent growth since 2005. The Q4 number is still unknown, however, because the recent government shutdown prevented the Bureau of Economic Analysis from producing the gross domestic product report that was to be released in late January. The fourth quarter report is now scheduled to be released on Feb. 28.
The Bureau of Labor Statistics was not affected by the shutdown, and the agency announced that, in January, the economy added 304,000 jobs while the unemployment rate crept up to 4 percent.
“Job gains occurred in several industries, including leisure and hospitality, construction, health care, and transportation and warehousing,” the bureau reported.
Confidence in the manufacturing sector remains fairly strong, with the Institute for Supply Management’s Purchasing Managers Index increasing 2.3 points to 56.6, which was 1.9 points below the average for 2018.
“Comments from the panel reflect continued expanding business strength, supported by strong demand and output,” the chair of ISM’s Manufacturing Business Survey Committee said.
Some members of the panel noted the presence of negative factors, even amid the overall good conditions, including one who observed that “steel tariffs continue to put upward pressure on prices of downstream materials.”
Consumers, meanwhile, felt less confident in January than they did in December, according to The Conference Board’s Consumer Confidence Index, which fell from 126.6 to 120.2. The board’s senior director of economic indicators said that “financial market volatility and the government shutdown appear to have impacted consumers.”
“Shock events such as government shutdowns (i.e., 2013) tend to have sharp, but temporary, impacts on consumer confidence,” she said. “Thus, it appears that this month’s decline is more the result of a temporary shock than a precursor to a significant slowdown in the coming months.”
The University of Michigan recorded a significant decline in its Index of Consumer Sentiment from 98.3 in December to 91.2 in January, the lowest level since Donald Trump’s election as president. The survey’s chief economist, like his counterpart at The Conference Board, noted the negative effects of the shutdown and said, “The typical impact of such ‘crisis’ events is short lived, with consumers quickly regaining lost confidence.”
Existing home sales fell 6.4 percent from November to December, according to the National Association of Realtors, with the median existing home sales price at $253,600, a 2.9 percent increase from a year earlier.
“Softer sales in December reflected consumer search processes and contract signing activity in previous months when mortgage rates were higher than today,” the association’s chief economist said. “Now, with mortgage rates lower, some revival in home sales is expected going into spring.”
Housing starts data for December are not yet available because of the shutdown.
The Dow Jones Industrial Average ended January at 24,999.67, a more than 7 percent increase for the month following a stagnant 2018. The S&P 500 Index on Jan. 31 closed at 2,704.10, recording a 7.9 percent monthly gain.
The dollar closed January trading at 0.87 euros, 0.76 pounds, 108.87 yen and 6.7 yuan.
The federal government’s 35-day shutdown will cut into growth for both the fourth quarter of last year and the first quarter of this year. Even when the government is fully operational, the uncertainty that accompanies a dysfunctional policy-making process is, generally, not good for business. And, of course, the Trump administration’s steel tariffs and other aspects of its protectionist trade policy continue to stifle growth. It is impossible to calculate just how many billions of dollars in output have been lost to such easily avoidable factors. If the current expansion ends this year or next, the economy will not have died of natural causes; it will have been murdered.
February Steel Shorts
Steel Companies Boost Spending on Lobbying
Steel companies last year sharply increased their spending on federal lobbying to $12.18 million, 20 percent more than in 2017 and 48 percent more than in 2016, according to the Center for Responsive Politics.
The biggest spenders were Nucor at $2.23 million, ArcelorMittal at $1.47 million and U.S. Steel at $830,000.
The increase in government relations activity by steel manufacturers occurred amid Trump administration policies that impose a 25 percent tariff on steel imports in the name of national security. Those levies have produced a backlash and some thus far unsuccessful efforts in Congress and the courts to block the tariffs.
“Our job is to keep making our case on this,” American Iron and Steel Institute President Tom Gibson said of the tariffs, according to The Wall Street Journal. The institute spent $552,980 on lobbying in 2018.
The tariffs appear to have significantly boosted the fortunes of steel companies in the United States. Nucor’s net income increased from $1.32 million in 2017 to $2.31 million in 2018, while U.S. Steel’s net income rose from $387,000 in 2017 to $1.12 million in 2018, according to financial reports.
Trade Associations Seek Lifting of Steel, Aluminum Tariffs on Canada, Mexico
Forty-six trade associations on Jan. 23 wrote to two members of the Trump administration to urge them to eliminate steel and aluminum tariffs on Canada and Mexico.
Negotiators recently completed work on the U.S.-Mexico-Canada Agreement (USMCA), which, upon ratification, will replace the North American Free Trade Agreement (NAFTA). The new pact, however, does not address the steel and aluminum tariffs that the administration imposed in 2017.
“For many farmers, ranchers and manufacturers, the damage from the reciprocal trade actions in the steel dispute far outweighs any benefit that may accrue to them from the USMCA,” the associations, representing agriculture, restaurants, industrial manufacturing and several other sectors, wrote in the letter. “The continued application of metal tariffs means ongoing economic hardship for U.S. companies that depend on imported steel and aluminum, but that are not exempted from these tariffs. Producers of agricultural and manufactured products that are highly dependent on the Canadian and Mexican markets are also suffering serious financial losses.”
The letter was sent to Commerce Secretary Wilbur Ross and U.S. Trade Representative Robert Lighthizer.
Executive Order Extends Buy American Preferences to Infrastructure Projects
President Donald Trump on Jan. 31 signed an executive order aimed at increasing the use of American-produced steel and other raw materials.
The order extends “Buy American Principles” to certain federally funded infrastructure programs. It directs agencies to “encourage recipients of new Federal financial assistance awards pursuant to a covered program to use, to the greatest extent practicable, iron and aluminum as well as steel, cement, and other manufactured products produced in the United States in every contract, subcontract, purchase order, or sub award that is chargeable against such Federal financial assistance award.”
On April 18, 2017, Trump issued an executive order stating that “It shall be the policy of the executive branch to buy American and hire American” and outlining steps to implement that policy.
Trump campaigned on an America first platform that, in office, has led to procurement preferences for U.S. companies and trade protection for the steel industry and others.
U.S. Steel Resumes Plant Construction Because of Tariffs
U.S. Steel is restarting construction on a mill in Alabama, a move the company attributed in part to “strong trade actions” by the Trump administration.
The company suspended construction of an electric arc furnace steelmaking facility in Fairfield, Ala., in 2015 because of “unfavorable market conditions.” But with those conditions changing as a result of the 25 percent tariffs that the administration imposed on steel imports in 2017, it decided to resume work on the plant.
“Thanks to the president’s strong trade actions and improved market conditions, support from the United Steelworkers and incentives from the state of Alabama and the Jefferson County Commission, we are excited to add EAF capabilities to our company’s footprint and provide sustainable tubular solutions for our customers,” U.S. Steel President and CEO David Burritt said.
The facility is expected to have a capacity of 1.6 million tons and to employ about 150 people. Production is expected to begin in late-2020.
A Brief Introduction to U. S. Trade Remedy Provisions
Steven W. Baker
Law Offices of Steven W. Baker
U. S. trade remedies have recently become an even more major concern for importers of goods to the U. S., and, due to foreign retaliation against U. S. origin goods, for exporters as well. Many remedies are identified by shorthand names such as “safeguard,” “escape clause” or national security actions. Many are also identified by the section number of the law establishing them, even though there may have been multiple amendments between then and now.
Trade remedies are embodied in U. S. (and numerous other country) laws, but their use is covered by various agreements reached internationally under the World Trade Organization (WTO). These agreements allow WTO members to suspend certain obligations, most often bound tariff rates, without any retaliation by the targeted countries, provided specific conditions have been demonstrated and the required procedures have been followed. The WTO may require a country that fails to meet the conditions or follow the procedures to end its remedy actions; if that country does not to do so the WTO may authorize the targeted country or countries to impose retaliatory sanctions up to the value of any lost benefits.
Some of the most significant remedy provisions are:
Section 201 of the Trade Act of 1974 (19 U. S. C. §2251) permits the President to grant temporary import relief, by raising import duties or imposing nontariff barriers on goods entering the United States in such increased quantities that they injure or threaten to injure domestic industries producing like goods. These “safeguard” or “escape cause” actions involve an investigation and recommendations by the U. S. International Trade Commission (ITC).
Section 232 of the Trade Expansion Act of 1962 (19 U. S. C. §1862) authorizes the President, through tariffs or other means, to adjust the imports of goods or materials from other countries if it deems the quantity or circumstances surrounding those imports threaten national security. An investigation is conducted and recommendations made by the Department of Commerce (DOC). There is considerable controversy both within the U. S. and the WTO regarding what is meant by national security, and whether certain actions should be considered safeguard rather than national security actions, perhaps permitting retaliation.
Section 301 of the Trade Act of 1974 (19 U.S.C. §2411) authorizes the President to take all appropriate action, including retaliation, to obtain the removal of any act, policy, or practice of a foreign government that violates an international trade agreement or is unjustified, unreasonable, or discriminatory, and that burdens or restricts U.S. commerce. This has primarily been applied to intellectual property complaints, although other practices may be involved. Investigation is conducted by the United States Trade Representative (USTR).
Section 337 of the Tariff Act of 1930 (19 U.S.C. §1337) makes unfair methods of competition and unfair acts involving the importation and sale of certain articles in the U.S. unlawful. These actions involving patent, copyright, trademark and trade secret issues are investigated and remedies including Exclusion Orders are imposed by the ITC.
Although not generally identified by a Section number, Antidumping duties are assessed under Section 701 of the Tariff Act of 1930 (19 U.S.C. §1671) when it is determined that foreign suppliers or manufacturers are selling goods in the United States at a less-than-fair market value. Dumping occurs when goods are sold at a price less than that of the exporter’s home market, or at a price lower than the goods’ cost of production. To receive an AD duty, the dumping must be proven harmful to a company or industry in the United States. The amount of the AD duty is usually calculated to offset the margin of dumping. The injury determination is made by the ITC, and the dumping margin calculated and the Order imposed by the International Trade Administration (ITA) of the DOC.
Similarly, Countervailing Duties are applicable under Section 731 of the Tariff Act of 1930 (19 U.S.C. §1673) when a foreign government provides subsidies or assistance to a local industry. This can be in the form of low-rate loans, tax exemptions, or indirect payments. The assistance provided enables these suppliers and manufacturers to potentially export and sell the goods for less than domestic companies. Countervailing duties also in most instances require a finding of injury or threat of injury to a domestic industry, made after an investigation by the ITC. The amount of the subsidy is calculated by the ITA, and a CV duty is assessed based on the value of the subsidy.
Actions taken (or not taken) under the several remedy provisions are subject to varying levels of judicial review. Remedies imposed by the President generally receive less oversight, while those imposed by the ITA and ITC have more detailed review provisions. All are also subject to review by the WTO for conformity with the international agreements, although as noted the characterization of national security (Section 232) remedies and the appropriate level of review are the subject of current challenges.
Save the Date
Steel-Con 2019 | Houston, TX
69th AIIS Annual Dinner | The Yale Club of New York City