May 2019 Market Update
The U.S economy recorded its best first quarter performance in four years, growing by 3.2 percent from January to March, according to the Bureau of Economic Analysis.
In recent years, the first quarter has tended to be relatively weak, with harsh winter weather in parts of the country often blamed for less than robust growth. This year’s performance, though, exceeded expectations and was the best to start the year since gross domestic product (GDP) expanded by 3.3 percent in Q1 of 2015.
“The increase in real GDP in the first quarter reflected positive contributions from personal consumption expenditures, private inventory investment, exports, state and local government spending, and nonresidential fixed investment,” the BEA reported. “Imports, which are a subtraction in the calculation of GDP, decreased. These contributions were partly offset by a decrease in residential investment.”
Since April 2018, the economy has recorded quarterly growth of 4.2 percent, 3.4 percent, 2.2 percent and, now, 3.2 percent.
President Donald Trump boasted that the “GDP is an incredible number.”
“But remember this,” he added. “We have great growth and also very, very low inflation. Our economy is doing great. Number one in the world. We’re the number one economy right now in the world and it’s not even close.”
The first quarter number appears to have quieted some pessimists and quelled concerns that negative growth could be looming. For example, an economist with Macroeconomic Advisers, a forecasting firm, told The New York Times, “The angst has settled, and the economy has come back. I just can’t point to anything now that’s going to push us into recession.”
Some people are giving the Federal Reserve some credit for the expansion. The Fed has steadily increased rates during the past two years, and multiple hikes were expected in 2019, something that Trump has strongly advocated against. But with Fed Chairman Jerome Powell pledging in January that the central bank would be “patient as we watch to see how the economy evolves” and the Federal Open Market Committee reiterating that “patient” stance multiple times since then – most recently following its April 30-May 1 meeting – investors have become more confident that the Fed will allow the economy to grow and not apply the brakes this year. The target range for the federal funds rate has remained 2.25-2.5 percent since December.
The Fed has been able to hold back because, as Trump noted, even as the economy has grown, inflation has remained low. Inflation (excluding food and energy) in the first quarter was 1.7 percent, according to the Federal Reserve Bank of St. Louis, and apart from hitting 2 percent in the third quarter of last year and 2.1 percent in the first quarter of 2012, it has remained below the Fed’s target of 2 percent since the end of the Great Recession.
The Fed noted after its most recent meeting that the “labor market remains strong,” and the Bureau of Labor Statistics confirmed that assessment two days later on May 3 when it announced that the economy exceeded expectations by creating 263,000 jobs in April, pushing the unemployment rate down to 3.6 percent, the lowest level in half a century. The Washington Post reported that, “The United States has more job openings than unemployed people” and “Business leaders increasingly say their No. 1 challenge is finding enough people to fill job openings.”
The tight labor market appears to finally be pushing pay higher. Year-over-year wage growth reached 3.4 percent in March and it has been above 3 percent since July of last year, according to the Economic Policy Institute. Prior to that stretch, wage growth during the economic recovery of the past decade rarely reached even 2.5 percent.
Consumer confidence remains strong, with The Conference Board’s Consumer Confidence Index coming in at 129.2 in April, up 5 points from March. (The index’s baseline is 100 in 1985.) “Overall, consumers expect the economy to continue growing at a solid pace into the summer months. These strong confidence levels should continue to support consumer spending in the near-term,” the board’s senior director of economic indicators said.
Confidence in the manufacturing sector appears to be not quite as strong, at least according to the Institute for Supply Management’s Purchasing Managers Index, which in April recorded its lowest rating in about 2½ years – 52.8. The index had been above 60 as recently as August, but it has been slipping since then. Of 18 manufacturing industries surveyed, 13 reported growth.
“Comments from the panel reflect continued expanding business strength, but at the softest levels since the fourth quarter of 2016,” the chairman of the institute’s Manufacturing Business Survey Committee said.
Housing starts in March were largely unchanged from February but were 14.2 percent below the March 2018 level, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales fell almost 5 percent from February to March, the National Association of Realtors reported, though the association’s chief economist said it was “not surprising to see a retreat after a powerful surge in sales in the prior month. Still, current sales activity is underperforming in relation to the strength in the jobs markets. The impact of lower mortgage rates has not yet been fully realized.”
The Dow Jones Industrial Average closed at 26,592.91 on April 30, up 14 percent on the year. The S&P 500 Index ended April at 2,945.83, recording year-to-date gains of 17.51 percent.
The dollar, as of the end of April, was trading at 0.89 euros, 0.77 pounds, 111.43 yen and 6.74 yuan.
The American economy has not been this strong since at least the tech boom of the 1990s. Yet the Trump administration, which can justifiably claim that its policies of cutting taxes and regulations have significantly contributed to the current growth, has inexplicably made itself the biggest threat to continued expansion. Trump continues to push an anti-trade agenda, most recently imposing tariffs on an additional $200 billion of Chinese goods, a move that led China to retaliate by targeting $60 billion in American imports with tariffs. While Trump has insisted that Chinese firms will pay the levies imposed by his administration and that there is “no reason” to think that Americans’ purchasing power will be affected, this claim is somewhere between disingenuous and economically naïve. His own top economic adviser, Larry Kudlow, acknowledged as much on “Fox News Sunday” on May 12, saying, “Both sides will pay. Both sides will suffer for this.” And the suffering might increase. China has vowed that it will “never surrender to external pressure” and Trump has expressed a willingness – even an eagerness – to broaden the tariffs to cover all Chinese imports, which totaled $540 billion last year. Trump’s signature legislative achievement so far is reducing taxes, yet in tweeting that, “I am very happy with over $100 Billion a year in Tariffs filling U.S. coffers…great for U.S., not good for China,” he is bragging about unwittingly doing the equivalent of raising taxes on Americans – and holding the economy’s full potential hostage to his economically indefensible fetish for protectionism.
May Steel Shorts
U.S. Lifts Steel, Aluminum Tariffs on Canada, Mexico
The United States is lifting the tariffs it imposed on steel and aluminum imports from Canada and Mexico last year.
The Trump administration justified its 25 percent tariff on imported steel and 10 percent tariff on foreign aluminum by citing national security concerns under Section 232. Canada and Mexico, close allies and trading partners who purchase about 90 percent of America’s steel exports, were not pleased to be regarded as national security threats and imposed retaliatory tariffs.
The three countries reached an agreement in May that will remove the tariffs while committing each country to “implement effective measures” to prevent dumping and block the “transshipment” of steel and aluminum from countries outside North America to the United States via Canada or Mexico. The countries also agreed to establish a process to monitor the steel and aluminum trade, and if imports “surge meaningfully beyond historic volumes of trade over a period of time, with consideration of market share, the importing country may request consultations with the exporting country. After such consultations, the importing party may impose duties of 25 percent for steel and 10 percent for aluminum in respect to the individual product(s) where the surge took place.”
President Donald Trump said in a May 19 proclamation that, “ In my judgment, these measures will provide effective, long-term alternative means to address the contribution of these countries’ imports to the threatened impairment of the national security.”
Separately, the countries in November concluded negotiations on the United States-Mexico-Canada Agreement to replace the North American Free Trade Agreement (NAFTA). The deal on steel and aluminum tariffs is expected to ease approval of the broader trade pact by lawmakers in the three nations.
Tariffs Being Paid ‘Entirely’ by U.S. Businesses, Consumers, Goldman Sachs Concludes
The prices of imported Chinese goods on which tariffs were imposed by the United States have risen significantly, indicating that “the costs of US tariffs have fallen entirely on US businesses and households,” according to an analysis from Goldman Sachs.
The financial firm in May compared the consumer price index (CPI) for nine categories of goods that were subject to tariffs to the CPI for all other goods. The two measures closely track each other until the tariffs were imposed in early 2018, at which point the prices of targeted goods shoot up while the prices of other products slightly decrease.
Researchers noted that the price increases extend beyond imports because of domestic producers who have acted “opportunistically”: “The effects of the tariffs have spilled over noticeably to the prices charged by US producers competing with tariff-affected goods.”
President Donald Trump in May broadened the tariffs to include an additional $200 billion in Chinese imports. China retaliated by targeting $60 billion in U.S. goods for tariffs.
U.S. Imposes Sanctions on Steel Exports from Iran
The steel trade is now involved in the United States’ dispute with Iran.
Ever since the Trump administration a year ago pulled out of the 2015 multilateral deal that was intended to prevent Iran from developing nuclear weapons, it has sought to increase pressure on that country’s regime. As part of this effort, on May 8, the United States imposed sanctions on the nation’s exports of steel and other industrial metals, which the White House says is Iran’s largest source of non-petroleum-related export revenue.
“Today’s action targets Iran’s revenue from the export of industrial metals – 10 percent of its export economy – and puts other nations on notice that allowing Iranian steel and other metals into your ports will no longer be tolerated,” President Donald Trump said.
Analysts from S&P Global suggested that the new sanctions “may change little in the short term for Iran’s steel exporters or their customers abroad, in a trade environment that has already been restricted by existing secondary sanctions and anti-dumping actions.” It quoted the secretary of Iran’s Syndicate of Steel Pipe and Profile Manufacturers as observing that, “In the face of previous sanctions, Iranian manufacturers have developed new markets in southeast Asia, and exports to neighboring countries has been increasing since then.”
U.S. Halves Steel Tariffs on Turkey
The United States has halved the tariffs on steel imports from Turkey from 50 percent to 25 percent.
While Turkey, like most other nations, has been subject to a 25 percent steel tariff since early 2018, the Trump administration doubled that amount in August amid a dispute over the country’s two-year detention of an American pastor. The pastor was released in October. President Donald Trump did not directly link the tariff increase to the pastor’s captivity but rather described it as “a significant step toward ensuring the viability of the domestic steel industry.”
“Since the implementation of the higher tariff … imports of steel articles have declined by 12 percent in 2018 compared to 2017 and imports of steel articles from Turkey have declined by 48 percent in 2018,” Trump stated in a May 16 proclamation. “Given these improvements, I have determined that it is necessary and appropriate to remove the higher tariff on steel imports from Turkey.”
At the same time, the United States announced that it is dropping Turkey from a trade preference program for less prosperous countries because the nation “is sufficiently economically developed.”
U. S. Customs Update on Section 232 Tariff Removal for Canada and Mexico
U. S. Customs and Border Protection (CBP) released a CSMS message providing information on the Section 232 Steel and Aluminum tariffs for Canada and Mexico on May 19, 2019. This update implements the removal of Canada and Mexico from Section 232 coverage effective with entries filed on and after 12:01 a.m. Eastern Daylight Time on May 20, 2019. https://csms.cbp.gov/viewmssg.
The filing instructions indicate that importers should no longer use the chapter 99 provisions when entering goods otherwise covered by the steel and aluminum Section 232 sanctions which have a country of origin of Canada or Mexico. Importers should note that origin for Section 232 is based on the standard substantial transformation rules, and not the NAFTA origin rules.
CBP has also advised that as of mid-day on May 20, 2019 there is no information on the timing for the reduction of the Section 232 duties on Turkey from 50% to 25% as previously announced by the President.
China Section 301 New Proposed Tariff List
Basic Steel Mill Products Included
The USTR has released the proposed list of products to be added to the existing China Section 301 remedy. Additional tariffs of up to 25% are proposed on about $300 billion in annual Chinese imports to the U. S. This List 4 is stated to include essentially all imports from China that are not already covered by the first three product lists, with limited exceptions for pharmaceuticals, certain pharmaceutical inputs, select medical goods, rare earth materials, and critical minerals.
Basic steel mill products in tariff headings 7206-7229 and 7301-7306 were largely excluded from the previous lists, in part due to the fact that they were covered by the global Section 232 tariffs. If these List 4 steel products are added to the remedy, basic steel mill products from China could be subject to 25% duties under Section 232, another 25% under section 301, plus in many cases additional duties under antidumping and/or countervailing duty Orders.
The USTR proposal calls for public comments by and public hearings on June 17, 2019 regarding among other topics the proposed product coverage and the proposed rate of duty increase. Requests to participate in the hearings are due by June 10, 2019. Rebuttal comments are due seven days after the end of the hearings. These dates could be delayed, or the proposal withdrawn, depending on the results of the U. S. – China negotiations on the issues.
The USTR announcement can be accessed at:
Steven W. Baker
AIIS Customs Committee Chair