February 2020 Market Update
Judging by gross domestic product (GDP) growth, the U.S. economy is fair to middling, having expanded by 2.3 percent in 2019, according to the Bureau of Economic Analysis.
According to many Americans, though, the economy is the best it has been in many years. Gallup reported in January that, according to its surveys, a record high of 59 percent of Americans say they are better off financially than they were a year ago, and an all-time low of just 20 percent said they are worse off. In addition, 74 percent of Americans expect to be in a better financial position in a year – another record – while just 12 percent expect their finances to get worse.
Evidence of the country’s divided state can be found even in assessments of personal financial well being, though. While 78 percent of Republicans say they are better off today than they were a year ago and only 9 percent said they are worse off, the respective numbers for Democrats are 43 percent and 32 percent. Independents, not surprisingly, were almost exactly in the middle, at 58 percent and 21 percent.
Notably, however, even among Democrats, 60 percent expect their personal finances to improve in a year. This compares to 83 percent of Republicans and 76 percent of independents.
While the economy has not experienced the 3-4 percent growth that candidate Donald Trump talked about in 2016, it has, nonetheless, clearly inspired widespread confidence. Some economists say this is connected to the nation’s low unemployment rate, which stands at 3.6 percent after the addition of 225,000 jobs in January, the Bureau of Labor Statistics reported.
“Your chance of going to work tomorrow and getting laid off is lower than it’s ever been going back to 1948,” the chief economist at Pantheon Macroeconomics told The Washington Post. “That feeling of job security is very important.”
Similarly, The Conference Board’s Consumer Confidence Index increased to 131.6 in January, which, while not a record, is a historically high number that the board’s senior director of economic indicators said was “driven primarily by a more positive assessment of the current job market and increased optimism about future job prospects.”
Since consumer spending accounts for more than two-thirds of the country’s economic activity, consumer confidence can be a self-fulfilling prophecy. It cannot, however, be a perpetual motion machine, and sluggish business investment – which declined in the second, third and fourth quarters of last year to reach its lowest point since Q3 of 2016, according to the Federal Reserve Bank of St. Louis – and a manufacturing sector made anxious by trade disputes have weighed down GDP numbers.
With one small exception in October, the Institute for Supply Management’s Purchasing Managers Index declined from March (when it was at 54.6) to December (47.8) last year, before bouncing back to 50.9 in January. An index of more than 50 indicates growth in the manufacturing sector. Of the 18 industries in which supply executives were surveyed, eight reported growth.
During the Jan. 28-29 meeting of the Federal Reserve’s Federal Open Market Committee and Board of Governors, Fed officials said that they expect “economic growth to continue at a moderate pace,” although they noted that “business investment and exports remained weak and that manufacturing output had declined over the past year,” according to minutes of the meeting. There were differing interpretations of the importance of the phase one trade deal with China that President Trump signed in January. While some of the central bankers were “cautiously optimistic about the effects on the business sector,” others expected that the impact “would be relatively limited, as trade uncertainty would likely remain elevated, with the possibility remaining of the emergence of new tensions as well as the reescalation of existing tensions.”
The Fed kept the target range for the federal funds interest rate unchanged at 1.5 to 1.75 percent, and the meeting minutes recorded that “participants viewed the current stance of policy as likely to remain appropriate for a time.”
Housing starts declined by 3.6 percent from December to January, but were 21.4 percent higher than they were in January 2019, according to the Census Bureau and the Department of Housing and Urban Development. Confidence in the sector remains high, with the National Association of Home Builders/Wells Fargo Housing Market Index at a level not seen since the late 1990s.
“Steady job growth, rising wages and low interest rates are fueling demand, but builders are still grappling with increasing construction and development costs,” the association’s chairman said.
Existing home sales, meanwhile, increased 3.6 percent from November to December. Total sales in 2019 matched those of the previous year, and the group’s chief economist said the year was “neutral” because “low inventory remains a problem, with first-time buyers affected the most.”
The Dow Jones Industrial Average closed at 28,256.03 on Jan. 31, down 0.72 percent for the first month of 2020. The S&P 500 ended the month at 3,225.52, recording a 0.16 year-to-date decline.
At the end of January, the dollar was trading at 0.9 euros, 0.76 pounds, 108.5 yen and 6.94 yuan.
During the 1980 presidential campaign, Ronald Reagan famously asked voters, “Are you better off than you were four years ago?” With incumbent Jimmy Carter on the hook for a recession, an energy crisis and the Iran hostage situation, Reagan won handily, and four years later, running for reelection against Carter’s vice president, he proclaimed that it was “morning again in America.” This year, Trump may combine variations of those messages, arguing that most Americans are better off now than they were in 2016 and that his reelection would “keep America great.” Although he has measures of confidence on his side, other data are mixed. The economy’s performance from 2017 through 2019 was very similar to what it was during the last three years of the Obama administration, and, notwithstanding the strong labor market, job growth during those two timeframes was significantly higher under Obama. And although trade tensions with China have eased somewhat, it is unclear how much the new bilateral pact will undo the damage that has been wrought by tariffs in recent years. In addition, China’s role in the world economy is being shaken by the coronavirus outbreak, which so far has had a relatively minor impact on the U.S. economy, though that could change depending on the epidemic’s severity. Given that consumers are driving the nation’s economic growth almost entirely on their own, there may be a certain fragility to the expansion. After all, if consumers start to have doubts, The Great Communicator might have been able to restore their confidence, but The Great Tweeter would likely have a much more difficult time.
|February 2020 Steel Shorts|
|Trump Extends Tariffs to Steel and Aluminum Derivatives|
President Trump has extended the steel and aluminum tariffs he imposed two years ago to cover some products made from those materials.In March 2018, Trump placed 25 tariffs on steel imports and 10 percent tariffs on aluminum imports, claiming authority under Section 232 to protect domestic production in the interest of national security. Some countries have been exempted from the tariffs. AIIS has argued in court that the tariffs should be struck down as unconstitutional. In a Jan. 24 proclamation, Trump stated that, while steel and aluminum imports have declined, “imports of certain derivatives of aluminum articles and imports of certain derivatives of steel articles have significantly increased since the imposition of the tariffs and quotas.” As a result, Trump extended the tariffs, effective Feb. 8, to certain “derivative” aluminum and steel products, such as nails, cables, staples and some vehicle parts. Canada, Mexico and some other countries were exempted.The tariff extension is already being challenged in the U.S. Court of International Trade. A lawsuit filed by PrimeSource Building Products argues that the procedures leading up to the presidential proclamation were flawed and that the proclamation itself is “unlawful and unconstitutional.”
NAFTA Replacement Signed into Law
President Trump in January signed into law the United States-Mexico-Canada Agreement, which replaces NAFTA.As a candidate, Trump called the North American Free Trade Agreement (NAFTA) “the worst trade deal, maybe ever signed anywhere,” and trade officials from the three North American nations have been negotiating a new deal since a few months after his inauguration in 2017.The new pact, which was passed by both the House and Senate with large majorities, addresses topics and technologies that have emerged since NAFTA was implemented in 1994, such as the Internet and certain intellectual property issues. In addition to these updates, it also implements new labor and environmental mandates and establishes additional conditions in order for products to be free from tariffs. In the case of vehicles, for example:
• 70 percent of the steel and aluminum must be from North America
• 75 percent of the overall content must be produced in North America (NAFTA set the threshold at 62.5 percent)
• 40-45 percent of a vehicle’s components must come from factories that pay workers at least $16 per hourThe agreement includes a sunset clause after 16 years, but it can be extended when the three countries review it every six years. Mexico has also ratified the deal, but it will not go into effect until 90 days after Canada grants its expected approval.
Study Finds Overall Negative Impact from Recent Trade Disputes
Two members of the Federal Reserve Board of Governors concluded in a December study that the trade disputes of the past three years have done more harm than good to the United States. “Our results suggest that the tariffs have not boosted manufacturing employment or output, even as they increased producer prices,” the study states. “While the longer-term effects of the tariffs may differ from those that we estimate here, the results indicate that the tariffs, thus far, have not led to increased activity in the U.S. manufacturing sector.” They went on to note that using trade policy to protect domestic industries is “complicated by the presence of globally interconnected supply chains.” In January, President Trump signed a “phase one” trade deal with China that eases tariffs on both sides and commits China to buy more U.S. goods over the next two years, though there are some doubts about whether the purchase targets are realistic.
Commerce Department Announces Trade Enforcement Actions
The U.S. Department of Commerce announced the following steel-related trade enforcement actions in January:
• Affirmative final determinations on Jan. 24 in the antidumping duty investigations of imports of fabricated structural steel from Canada, China and Mexico and in the countervailing duty investigations of those imports from China and Mexico.
• The initiation on Jan. 9 of antidumping duty and countervailing duty investigations into imports of forged steel fluid end blocks from Germany, India and Italy, as well as a countervailing duty investigation into those imports from China.
• An affirmative preliminary determination on Jan. 3 in the antidumping duty investigation of imports of collated steel staples from China.
Customs Issues GUIDANCE on the Additional Duty on Imports of Derivative Aluminum and Steel Articles
U. S. Customs and Border Protection (CBP) issued a Guidance document covering the Customs procedures applicable to the new duties imposed on derivative aluminum and steel articles under Section 232 on February 4, 2020, CSMS #41538803. The new Section 232 duties imposed by the President are effective on entries filed on and after February 8, 2020.
Derivative products are “downstream” articles from the original Section 232 article coverage in which aluminum or steel represent at least two thirds of the value of the finished article. The articles must meet certain thresholds for increased import volumes. The articles identified by the President for imposition of additional duties are steel nails, tacks, drawing pins, corrugated nails, staples, and similar derivative articles; aluminum stranded wire, cables, plaited bands, and the like (including slings and similar derivative articles); and bumper and body stampings of aluminum and steel for motor vehicles and tractors. They are specifically identified in the CSMS message, together with the applicable tariff numbers and Chapter 99 tariff numbers. https://content.govdelivery.
The Customs procedures for these newly identified articles will be essentially the same as those already in place for Section 232. Entry documents must show the applicable Chapter 99 numbers as well as the tariff classifications for the articles themselves; additional duties of 25% for steel and 10 % for aluminum will be collected; the quota and excluded countries remain the same; restrictions apply for FTZ entries; GSP and AGOA preferences are not recognized; drawback will not be allowed. Further Guidance will be issued if product exclusions are granted.
A court action has already been filed seeking an injunction against implementation of these additional duties, based on the previous decision in the case on the increase of duties for steel from Turkey. That case (currently under appeal) held that the President’s authority under Section 232 could only be exercised within specified time periods and pursuant to specific procedures. Unless and until the court acts, CBP will follow the procedures outlined above with regard to importation of the specified derivative products.
Steven W. Baker
AIIS Customs Committee Chair