July 2019 Market Update
The U.S. economy in June set a record for the longest expansion in the nation’s history – 10 years and one month, a streak that began in June 2009 following the Great Recession.
Growth, while sustained, has not been overly impressive, however. In fact, the cumulative expansion of 25 percent is well below other post-World War II growth spurts. Annual growth during the past 10 years has been 2.3 percent, compared to an average of 4.3 percent during the nine other postwar expansions, the publication Chief Investment Officer noted.
In the first quarter, the economy achieved a 3.1 percent annualized growth rate, according to the Bureau of Economic Analysis. In 2018, quarterly growth was 2.2 percent, 4.2 percent. 3.4 percent and 2.2 percent.
Even with the strong growth, President Trump continues to press the Federal Reserve to lower interest rates to provide an additional economic boost.
“If we had a Fed that would lower interest rates, we would be like a rocket ship,” Trump said in early July before lamenting, “We don’t have a Fed that knows what it’s doing.”
The Federal Reserve, however, has indicated – in economist-speak – that it may be Trump’s trade policies, not interest rates, that are keeping the economy from reaching orbit. In its midyear Monetary Policy Report, which was submitted to Congress in early July, the Fed stated that tariffs imposed by the Trump administration on China and other countries “appear to have lowered imports and exports in the United States and elsewhere, while uncertainty surrounding trade policy could be leading firms to delay investment decisions and reduce capital expenditures.”
Notably, Trump’s protectionism could get him the lower rates that he wants, with the Fed appearing to have shifted from planning to continue to gradually raise rates through 2019 to possibly cutting them, in part because of the economic threat posed by tariffs.
“The case for somewhat more accommodative policy has strengthened,” Federal Reserve Chairman Jerome Powell said in June. “It’s really trade developments and concerns about global growth that are on our minds. … Risks seem to have grown.”
At its June meeting, the Federal Open Market Committee kept the target range for the federal funds rate unchanged at 2.25 to 2.5 percent, while noting that “economic activity is rising at a moderate rate.” The Fed’s brief post-meeting announcements are mostly boilerplate statements, and individual word changes are closely examined by economic and political analysts for meaning. The notable change in the June statement as compared to preceding ones is that the Fed had been describing the economy as growing at a “solid rate,” rather than a merely “moderate rate.”
The Fed last raised rates in December 2018.
One strong positive sign for the economy is that it added 224,000 jobs in June, according to the Bureau of Labor Statistics. The unemployment rate inched up a tenth of a point from a nearly 50-year low to 3.7 percent. Weak job growth in May – only 75,000 jobs were created during the month – had raised some concerns about the nation’s economic prospects. Wages increased 3.1 percent from June 2018, solid growth for the post-Great Recession era but probably low enough not to raise inflation fears that could cause the Fed to rule out an interest rate cut.
Confidence in the manufacturing sector, though, appears to be waning, with the Institute for Supply Management’s Purchasing Managers Index falling for the third straight month. The index, now at 51.7, is at its lowest point since late 2016. Of 18 industries surveyed, 12 reported growth. “Respondents expressed concern about U.S.-China trade turbulence, potential Mexico trade actions and the global economy,” the chair of the institute’s Manufacturing Business Survey Committee said. “Overall, sentiment this month is evenly mixed.” Among the survey respondents who cited the impact of trade disputes, one representative of the fabricated metal products sector said, “Tariffs continue to adversely impact decisions and forecasting. Our increasing fear is that current trends will weaken the global economy, influencing our ability to grow in 2020 and beyond.”
Confidence has also slipped among consumers, with The Conference Board’s Consumer Confidence Index dropping from 131.3 in May to 121.5 in June, its lowest level since September 2017. And consumers appear to have some of the same concerns as manufacturers. “The escalation in trade and tariff tensions earlier this month appears to have shaken consumers’ confidence,” the board’s senior director of economic indicators said. “Although the index remains at a high level, continued uncertainty could result in further volatility in the index and, at some point, could even begin to diminish consumers’ confidence in the expansion.”
Housing starts were largely unchanged from May to June, increasing by less than 1 percent, though the June total was 6.2 percent higher than a year earlier, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales fell 1.7 percent from May to June, the National Association of Realtors reported, with the group’s chief economist attributing the decline, as he has before, to low inventory. “Imbalance persists for mid to lower-priced homes with solid demand and insufficient supply, which is consequently pushing up home prices,” he said. The median price for existing homes hit an all-time high in June of $285,700.
The Dow Jones Industrial Average ended June at 26,599.96, recording year-to-date gains of 14 percent. The S&P 500 Index closed out the first half of the year at 2,941.76, up 17.4 percent since the start of 2019.
The dollar closed June trading at 0.88 euros, 0.79 pounds, 107.93 yen and 6.87 yuan.
The Federal Reserve knows that tariffs are bad for the economy. Other economists know it. Manufacturers know it. Consumers know it. And most politicians know it. Unfortunately, the one person in the United States whose opinion on the subject matters the most does not know it. The situation has become so bizarre that Trump in July bragged on Twitter about American farmers doing well because of billions of dollars in government assistance – what he called “China ‘replacement’ money” – that was necessitated by his tariffs. And, not for the first time, the people he was tweeting about found his claim to be less than accurate. The vice president of the American Soybean Association said, “To say we are doing great would be probably an overstatement. These markets are definitely still suppressed due to the tariffs.” And that is just one part of one sector of the economy. Overall, the economy, to this point, is surviving the tariffs. But, contrary to what one resident of 1600 Pennsylvania Avenue thinks, it is certainly not prospering because of them.
July Steel Shorts
AIIS Challenge to Steel Tariffs Will Follow Normal Appeal Route
The U.S. Supreme Court in June declined AIIS’s extraordinary request for a direct appeal from the judgment of the U.S. Court of International Trade (CIT) in AIIS’s challenge to the Trump Administration’s steel tariffs.This means that the appeal of the CIT’s March 2019 ruling by AIIS and two member companies, Sim-Tex and Kurt Orban Partners, will follow the normal course and be heard by the Court of Appeals for the Federal Circuit (CAFC).
“It is very rare for the Supreme Court to agree to hear a case before a ruling by the Court of Appeals,” AIIS President Richard Chriss said. “We continue to believe that we have a strong legal case that Section 232 is unconstitutional.”
AIIS is arguing that the administration’s implementation of the steel tariffs on national security grounds under Section 232 is an unconstitutional violation of the separation of powers.
With the appeal to the CAFC underway, the parties in the case are preparing for the appeal process to accelerate shortly. After the CAFC review, the case could wind up back at the Supreme Court, with, perhaps, a better chance of being accepted by the justices.
Trump Seeks to Require Much More Domestic Steel, Iron for Federal Projects
President Donald Trump is seeking to require that 95 percent of the steel and iron used in federal projects be made in America.
Goods made of steel and iron are currently considered to be of foreign origin – and, thus, largely excluded from federal projects – if more than 50 percent of those materials come from abroad, a level that was set during the Eisenhower administration. In a July 15 executive order, Trump directed the Federal Acquisition Regulatory Council to consider revising the regulations so that the threshold would drop to just 5 percent. For all other goods, Trump wants to decrease the level of allowable foreign inputs to 45 percent.
Peter Navarro, an aide to the president on trade issues, wrote on FoxNews.com that, “It is simply common sense to spend American taxpayer dollars on American materials and American labor.”
As with other regulations, this change will go through the public notice and public comment period before being considered for adoption.
U.S. Steel Lost 70% of Market Capitalization Since Implementation of Tariffs
Domestic steel producers may look at the Trump administration’s steel tariffs and think, “Be careful what you wish for.”
Multiple news outlets reported that the tariffs resulted in increased production in the United States at a time when global demand was falling, all of which drove down prices. While companies with more efficient plants and electric-arc furnaces have not been hit as hard, U.S. Steel has had to shut down some older blast furnaces that were more expensive to operate. In the 16 months since U.S. Steel and others cheered the implementation of tariffs, the nation’s second-largest steel producer has lost about 70 percent ($5.7 billion) of its market value.
Nucor, the country’s leading producer, has lost 20 percent of its market capitalization, but company CEO John Ferriola has described the transition away from older blast furnaces as a necessary “evolution” that was “sped up” by the recent market disruptions.
“Are some companies going to suffer? Absolutely,” he said. “Will we see some capacity go away? I’m sure of it.”
Commerce Department Announces Rulings in Trade Cases
The U.S. Department of Commerce recently announced the following actions in trade cases:
• The agency on July 18 announced affirmative final determinations in antidumping duty and countervailing duty investigations of imports of steel racks and parts from China. Dumping margins ranged from 18.06 to 144.5 percent, while subsidies were from 1.5 to 102.23 percent, the department said.
• Commerce on July 8 announced affirmative preliminary determinations in countervailing duty investigations of imports of fabricated structural steel from China and Mexico. Subsidies were found to have ranged from 30.3 to 177.43 percent in China and from 0.01 (de minimis) to 74.01 percent in Mexico. In a related investigation, the agency made a negative determination in a case involving alleged subsidies of fabricated structural steel from Canada.
• The department on July 2 announced affirmative final determinations in antidumping duty and countervailing duty investigations of imports of certain steel wheels from China. Dumping margins were from 38.27 to 44.35 percent, while subsidies ranged from 386.45 to 388.31 percent, according to the agency.
• Also on July 2, Commerce announced three preliminary affirmative circumvention rulings involving steel products from Vietnam. The agency determined that South Korea and Taiwan were routing certain corrosion-resistant steel products and cold-rolled steel to the United States through Vietnam to avoid trade duties.
AIIS Gulf Region Networking & Business Forum: Imported Steel – Trials, Tribulations, & Solutions | September 26 | Mobile, AL
The American Institute for International Steel, Inc (AIIS) cordially invites you to register for the 2019 – AIIS GULF REGION NETWORKING AND BUSINESS FORUM on September 26th, 2019 at the Renaissance Mobile Riverview Plaza Hotel in Mobile, AL. We are also pleased to advise this event will include a luncheon and facilities tour hosted by the Alabama State Port Authority.
Steel-Con® 2020 | Houston, TX | March 4-5
The program starts on Wednesday, March 4, 2020, with a networking reception from 5-7 PM at the Houstonian Hotel, where you will meet friends old and new, and interact with individuals at the forefront of key areas like shipping, logistics, customs, and international trade. The Conference begins the next day, Thursday, March 5 with a continental breakfast at 7 AM, and speakers’ presentations from 8 AM to 12 noon. The AIIS Annual Golf Tournament kicks off at 1:00 PM at the Wildcat Golf Club (March 5th.)
NCSD 2019 WEBINARS – STEEL PRODUCT CLASSIFICATION
The National Commodity Specialist Division of U. S. Customs and Border Protection (CBP) is once again in the summer of 2019 holding a series of webinars on Customs issues, primarily classification. The steel products being covered this year are Steel Wire, on Tuesday July 23, and Other Cast Articles of Steel, on Monday, July 29, both at 1:30 pm EDT. The Steel Wire program will be provided by NCS Ann Taub, and the Cast Articles program by NCS Angelia Amerson.
AIIS CUSTOMS CORNER | TRADE ACTIONS IMPOSE NEW/INCREASED BURDENS ON BOTH CBP AND IMPORTERS
Importers have recently been faced with many seldom used or new and unprecedented trade remedy actions, including Section 201 (solar cells and panels), Section 232 (steel and aluminum), Section 301 (China), and now International Emergency Economic Powers Act (IEEPA) (Mexico) actions, all of which involve not only substantial duty costs but also continued administrative expenses for compliance. Added to the more common antidumping and countervailing duty cases, these actions have required significant resources to learn about, plan for, and implement responses to each remedy.
Importers are not alone in this – U. S. Customs and Border Protection (CBP), despite lacking any authority for making the new policies, faces much of the burden of implementing them. For many of these actions CBP has had to make the changes required with only a few days – or even just a few hours – notice. Many involve large scale changes in ACE and other systems. CBP has provided information about these changes through the Cargo System Messaging Service (CSMS) and new and updated pages on the CBP website, as well as through various outreach activities.
CBP has advised that it has 162 new quotas (primarily Section 232 steel) to manage. Although product exclusion requests are decided by the Commerce Department (Section 232) or the USTR (Section 301), CBP has reviewed over 78,000 exclusion requests, primarily to determine if they would be enforceable. CBP has collected over $24 billion in additional duties due to these trade actions. The increased duty liability for importers has resulted in entry bond insufficiency notices rising from about 56 per month to over 1,000 per month.
This additional workload has come during a time when a government shutdown idled a substantial portion of CBP’s workforce for several weeks, followed by the shift of over 700 CBP officers from multiple airports and seaports to the Southern Border to assist with immigrant apprehensions. A major support in handling this additional workload has been increasing automation, expanding the activities handled in ACE – not just import entry filing, but also drawback, communications with importers and brokers, and the use of analytics applied to all the data now available. For example, the new ACE reports on Section 232 and Section 301 entries not only allow importers to view their activities, they also provide information for Customs to use in implementation and enforcement.
Importers should understand that CBP’s implementation of trade remedies has an impact on them in addition to the increased duties and quota limits and preparation of more complex entries. High duty rates and quantitative limitations can be an invitation to try to avoid or evade them, and CBP sees this as a major enforcement risk. Greater scrutiny not only in the form of full Focused Assessment audits, but also Quick Response Audits on specific issues, and audit surveys to determine if further action is required can be expected. An increase in the number of Requests for Information related to these new areas has already begun. Compliance Notification Letters – essentially advance warnings of possibly inquiry, with the added liability that a prior notification may impose –are likely for importers with significant volumes of imports covered by the trade remedies.
Importers should be aware of CBP’s enforcement stance and make extra efforts to ensure – and document – compliance with all the new (and often changing!) requirements. With the increased number of trade actions, the high risk levels, and the large number of imports involved, CBP may not have the time to provide warnings and compliance advice and could proceed to formal enforcement actions more quickly than in the past. Importer beware – and be aware.
Steven W. Baker
AIIS Customs Committee Chair
AIIS Annual Christmas Dinner | December 12 | Houston, TX
We cordially invite you to join in our Christmas holiday celebration as we prepare to welcome a New Year, and wish one another health, happiness, and prosperity. Enjoy good company and holiday cheer at:
The Houstonian Hotel, Club & Spa
Thursday, December 12, 2019
Cocktails at 6:00 pm Dinner at 7:00 pm
KEYNOTE SPEAKER: JEFF LINDNER, DIRECTOR OF FLOOD OPERATIONS/METEOROLOGIST, HARRIS COUNTY FLOOD CONTROL DISTRICT
Welcome New Member!
THE JORDAN INTERNATIONAL COMPANY
DAN MILIKOWSKY, President
The Jordan International Company was founded by my father, Matthew in 1946 when through a combination of skill and luck, he became Jones & Laughlin’s agent to Palestine. He continued in that role until the Korean War when there were no more exports.
My father passed away in 1969 and my brother, Nathan kept the business going. The agency business from Britain ended in 1970 and we started importing steel from Greece, Germany and Japan. I joined Jordan in 1971 and after working for a year, I worked in Detroit for four months for a service center learning about steel products.