April 2020 Market Update
The unprecedented economic disruption of the COVID-19 pandemic has, in less than two months, thrown the United States into its worst economic crisis since the Great Recession.
With much of the economy shut down to slow the spread of the coronavirus, the country lost 701,000 jobs in March, making it the worst month since 2009, and the unemployment rate increased by nearly a full percentage point to 4.4 percent, according to the Bureau of Labor Statistics. Nearly two-thirds of the job losses (459,000) were in the leisure and hospitality sector.
As bad as those numbers are, they almost certainly understate the damage. The bureau’s statistics are based on surveys that were conducted during the first half of March, but closures and shelter-in-place orders increased significantly during the last two weeks of the month.
Conditions are expected to worsen at least in the short term and, as Moody’s chief economist told reporters, “Much bigger job losses are coming,” maybe as many as 15 million, he said. That view is optimistic compared to some forecasts. An economist with the Federal Reserve Bank of St. Louis warned in a March 24 blog post on that bank’s website that, during the second quarter, 47 million people could lose their jobs, spiking the unemployment rate to an almost inconceivable 32 percent. (The worst unemployment rate during the Great Depression was 25 percent.)
That worst case scenario, however, is not based on a complex model or rigorous analysis, but is, as the post’s headline states, a calculation of “Back-of-the-Envelope Estimates of Next Quarter’s Unemployment Rate.” It was arrived at by simply averaging (to account for overlap in a blunt manner) two previous rough estimates by colleagues – one estimating that 66.7 million people are at “high risk of layoff” and another concluding that 27.3 million people are in “high contact intensity occupations.” The author of the March 24 post noted that his estimate “makes several important assumptions,” could actually fall within the range of 10 to 42 percent, and does not account for the impact of fiscal stimulus from the federal government.
On March 25, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2.2 trillion economic aid and stimulus package, the largest in history, that President Trump signed into law the next day. By comparison, the nation’s annual gross domestic product is about $20 trillion, the federal government, before the pandemic, was expected to spend a total of $4.7 trillion this fiscal year, and the 2009 stimulus bill totaled $831 billion (which would be about $1.02 trillion in current dollars). The legislation follows a $104 billion package that became law on March 18 and boosted sick leave and unemployment benefits.
The latest bill includes, among many other things, direct payments of $1,200 to individuals (plus $500 per child) with annual incomes of up to $75,000, with the amount declining to zero at $99,000, and multiple business loan programs, some targeted to small to mid-size firms, such as $350 billion in new (potentially forgivable) small business loans and $17 billion to temporarily cover payments for existing small business loans. In addition, $17 billion in loans are provided for “businesses critical to maintaining national security,” $25 billion in loans are earmarked for passenger airlines, and $454 billion in loans are appropriated to the Federal Reserve “for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, States, or municipalities.”
“This will deliver urgently needed relief to our nation’s families, workers and businesses,” Trump said before signing the bill. “That’s what this is all about. … We got hit by the invisible enemy, and we got hit hard. I think we are going to have a tremendous rebound.”
Although commonly called a stimulus bill, the legislation, some analysts say, is really more of a relief package. Researchers at The Brookings Institution, for instance, wrote on March 27 that, “Relief addresses immediate fallout while stimulus aims to restore robust economic activity. This bill is relief; it cushions people and businesses from the immediate losses caused by COVID-19 and makes it easier for them to comply with public health guidelines and mandates. Stimulus programs will come later.”
The question now is whether the cushion provided by the bill will enable an economic pause of sufficient length to “flatten the curve,” while positioning businesses and individuals for a recovery once social distancing rules and guidelines are lifted. There is already some talk of Congress taking up another funding bill.
James Bullard, the president of the Federal Reserve Bank of St. Louis – which published the blog post about unemployment possibly reaching 32 percent – said on CBS’s “Face the Nation” on April 5 that the $2.2 trillion bill “was well-sized” to provide relief for the impact of the pandemic in Q2. He noted that, in a $20 trillion economy, about $5 trillion in goods and services are produced each quarter.
“This shutdown means that we’re trying to only produce essential services and the goods and services that can be produced by workers working from home,” Bullard said. “Surely, that’s less than 50 percent of the total economy. So income is going to be down 50 percent. If you said that’s two and a half trillion, that sounds like about the number that Congress came up with here. So, in that sense, I think you’ve got the right amount of resources.”
The Federal Reserve’s Federal Open Market Committee is using monetary policy to try to alleviate the pressure on the economy. On March 15, the central bank dropped the target range for the federal funds interest rate one point to between zero and 0.25 percent. This followed a half-point cut in rates on March 3.
“The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals,” the Fed stated.
At the same time, the Federal Reserve announced that it will increase its holdings of Treasury securities by at least $500 billion and its holdings of mortgage-backed securities by at least $200 billion. The Fed is also launching several new business loan programs, including a Main Street Business Lending Program targeting small to mid-size businesses.
The Dow Jones Industrial Average hit a record high of 29,551.42 on Feb. 12. By March 23, it had lost 37 percent of its value to fall to 18,591.93, its lowest level since late 2016. It ended March at 21,917.16. Similarly, the S&P 500 reached an all-time high of 3,386.15 on Feb. 19 before plummeting by a third between then and March 23. It closed at 2,584.59 on March 31.
With the rest of the world also struggling with the effects of the pandemic, the already strong dollar has gained a bit more value. At the end of March, it was trading at 0.91 euros, 0.8 pounds, 107.5 yen and 7.08 yuan.
The Bureau of Economic Analysis is scheduled to release its measure of economic growth in the first quarter on April 29. It is widely expected to be negative – even though the first half to two-thirds of the quarter were largely unaffected by the pandemic – with the numbers becoming historically bad in the current quarter. JPMorgan Chase is projecting 10 percent negative growth in the first quarter and 25 percent shrinkage in the second. However, the bank is predicting a quick recovery, with the economy growing by 6 percent during the July to December period. Kiplinger forecasts a 21 percent decline in the second quarter, with growth in the last six months of the year sufficient to limit overall damage for 2020 to a 2 percent decline. The Conference Board, meanwhile, foresees minus-3.8 percent for Q1, minus-29.9 percent for Q2, and minus-5.9 percent for the year.
The next month could be the most important in the United States’ recent economic history. If the current shutdowns and social distancing efforts are successful, businesses can begin to plan – and hire – for a potentially quick recovery, aided by the likely release of a large amount of pent up demand, as well as the summer travel season. If the infection and death totals continue to climb, or if there is significant uncertainty about the success of mitigation efforts though, a lot of doors will stay shut for even longer, increasing the possibility of long-lasting economic damage. The federal government’s fiscal and monetary interventions can buy time, but at some point, they risk causing inflation and inflicting economic harm of their own. In the end, the outcome will depend on whether people follow official guidance and, to a previously unheard of degree, cease production and consumption. This is surely the first time ever that America had to purposefully impair the economy in order to save it.
|April 2020 Steel Shorts|
|Canada Ratifies USMCA; Implementation Could Be Within Months|
The Canadian Parliament on March 13 ratified the United States-Mexico-Canada Agreement (USMCA), positioning the NAFTA replacement to be implemented as early as July 1.
Lawmakers in the United States and Mexico had already approved the agreement. Following the vote in Canada, officials from both that nation and Mexico officially notified their American counterparts that they were ready to put the trade pact in place. That leaves it up to the Trump administration to decide how quickly to move forward with implementation.
While the White House had been targeting June 1 to replace what President Trump has derided as “perhaps the worst trade deal ever made,” the earliest date now possible based on the agreement’s terms is July 1. In addition, the COVID-19 pandemic may cause a further delay. A bipartisan group of lawmakers, including the chairman and ranking member of the Senate Finance Committee, wrote to U.S. Trade Representative Robert Lighthizer on March 30 asking him to hold off on enactment because “The COVID-19 pandemic has impacted governments, businesses, workers, and farmers globally, leaving little, if any, time and resources to prepare for a smooth transition to USMCA.”
The USMCA 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 hour
The agreement includes a sunset clause after 16 years, but it can be extended when the three countries review it every six years.
American Steel Groups Back Infrastructure Package with Buy America Provisions
Five American steel organizations wrote to congressional leaders on March 31 to urge lawmakers to fund an infrastructure package that includes a requirement to use domestically produced materials.
“Making a long-term and robust infrastructure investment now will not only respond to the urgent transportation system needs that are well known, but it also will create high paying jobs allowing businesses and families to recover from this extremely difficult economic shock” caused by the COVID-19 pandemic, the groups wrote. “The benefits from such a bill will flow throughout the economy.”
They asserted that the legislation could “put more Americans to work, improve quality of life in our cities, towns and rural areas and drive commerce and supplies across our nation … by including Buy America provisions and using domestically produced and fabricated steel.”
Separately, President Trump on March 31 tweeted support for a $2 trillion infrastructure package, writing, “With interest rates for the United States being at ZERO, this is the time to do our decades long awaited Infrastructure Bill.”
The organizations signing on to the letter included American Iron and Steel Institute, Specialty Steel Industry of North America, Steel Manufacturers Association, American Institute of Steel Construction, and Committee on Pipe and Tube Imports.
Administration Plans Limited Tariff Relief
The Trump administration plans to delay the collection of tariffs for 90 days on certain imports, not including steel and aluminum, Bloomberg reported on March 31.
The outlet said that the move, which is expected to come in the form of an executive order, would “apply to the most-favored nation tariffs, which are imposed on a non-discriminatory basis to countries exporting certain products to the U.S. such as footwear and apparel.” It is also expected to apply to a 25 percent tariff on imported light trucks. The deferral would have no effect on the administration’s steel and aluminum tariffs or its levies on Chinese imports.
Business groups have been advocating for tariff relief, with a U.S. Chamber of Commerce executive vice president saying on April 1 that it “would provide some welcome breathing room for American businesses and consumers.”
The Wall Street Journal reported on March 27 that the White House was planning to implement a broader tariff relief program and quoted a senior administration official as saying, “Customs duties will be suspended for three months.” Trump, though, dismissed the story as “fake news.”
Commerce Department Announces Trade Rulings
The Department of Commerce on March 24 announced an affirmative preliminary determination in the countervailing duty investigation of imports of forged steel fittings from India.The agency found that subsidies ranged from 2.65 percent to 284.91 percent.
On March 4, the department announced an affirmative preliminary ruling in a circumvention investigation of imports of steel concrete reinforcing bar from Mexico.
Commerce preliminarily determined that, in order to circumvent an antidumping duty order on rebar that is straight or in coil form, the Mexican company in question shipped “straight rebar that is bent at one or both ends” to the United States.
International Trade Remains an Essential Service During COVID-19 Emergency
International trade in goods remains an essential service despite the COVID-19 crisis. U. S. Customs and Border Protection (CBP), other federal agencies regulating trade, ports and terminals, carriers, and service providers including customs brokers and freight forwarders continue to work, although often under reduced hours, work at home arrangements, and temporary interruptions. There are continued and changing restrictions on certain goods by various countries and emergency procedures as well.
U. S. Customs
CBP in recent years moved many of its activities to virtual operations in the Centers for Excellence and Expertise, which has allowed many of its personnel to operate remotely. The National Commodity Specialists are also largely virtual as well. ACE and its various capabilities have made it more possible to perform many functions online. CBP personnel are operating on a remote basis to the extent reasonably possible.
Port activities including cargo inspections, pest inspections, and related activities do require greater in person involvement. Keeping personnel at a social distance and protected has caused some slowdown and reduction in services, but operations continue. CBP has been providing regular briefings to the trade regarding issues and concerns during the outbreak.
CBP did for a few days permit a delay in the payment of Customs duties and fees, but removed that possibility on March 26 except for extraordinary situations such as inability to pay due to port closure or technology outages. Several Senators and Representatives have requested that the President authorize a 90 day payment moratorium on duties and fees, similar to the one granted for income taxes. Unless and until that happens, however, normal payment requirements remain in effect. (The Canada Border Services Agency has granted an extension to June 30, 2020 for the payment of GST, duties and fees.)
Customs Brokers and Freight Forwarders; Ports and Terminals
Brokers and forwarders continue to operate, although like CBP personnel are doing so remotely to the extent possible. The rapid advances in automation have made this more feasible. Warehouses are included in essential services, as are maritime transportation workers, port workers, mariners, ship crewmembers, ship pilots and tug boat operators, and equipment operators. There have been and will likely continue to be periodic interruptions in activities, such as the temporary closures of some Houston terminals due to infected personnel, and the reduction of hours/days of operation due to reduced demand such as that seen in Baltimore.
Essential transportation services in addition to ocean include barge and inland waterway, rail, truck, air freight and employees supporting commercial transportation services. This includes last mile delivery and shipping companies, including private companies. Maintenance and support services for these activities are also considered essential.
Please take care of yourselves and everyone in the trade community at this trying time.
Steven W. Baker
AIIS Customs Committee Chair
|The Coronavirus Aid, Relief, and Economic Security (CARES) Act|
|The Coronavirus Aid, Relief, and Economic Security (CARES) Act – the $2.2 trillion package that was signed into law on March 28 – provides multiple programs aimed at assisting businesses, especially small businesses, during this year’s pandemic-related shutdowns.|
The largest of these is the Paycheck Protection Program, which provides $349 billion in forgivable loans of as much as $10 million each to help small businesses (those with no more than 500 employees) cover payroll and benefit costs, as well as certain overhead expenses, for up to eight weeks. Applicants can submit the Borrower Application Form to any participating bank or other lender. As part of the process, applicants must certify, among other things, that, “Current economic uncertainty makes the loan necessary to support your ongoing operations.”
As long as a loan recipient uses the money for the prescribed purposes, does not reduce the number of full-time employees, and does not decrease salaries by more than 25 percent for employees who make less than $100,000, the loan is eligible to be forgiven. (It is anticipated that no more than 25 percent of the forgiven amount may be for non-payroll costs.)
The program began accepting applications on April 3 and it is scheduled to run through June 30. All of the appropriated funds are expected to be exhausted by, if not before, that date, and the Trump administration has already asked Congress to provide an additional $250 billion for the program. Lawmakers seem receptive to the proposal, with Senate Majority Leader Mitch McConnell (R-KY) saying, “It is quickly becoming clear that Congress will need to provide more funding or this crucial program may run dry. That cannot happen. … Congress needs to act with speed and total focus to provide more money for this uncontroversial bipartisan program.”
Small businesses may also apply for an Economic Injury Disaster Loan through the Small Business Administration (SBA). This is an existing program, but the CARES Act provides for applicants to receive a near-immediate advance of as much as $10,000 from the SBA that “does not need to be repaid under any circumstance,” even if the loan application is not approved.
For small businesses with existing 7(a) loans, 504 loans, and microloans, the SBA will automatically pay the principal, interest and fees for six months. The SBA will also cover these costs for those types of loans that are issued prior to Sept. 27, 2020.
The legislation also created the Employee Retention Credit (FAQ). The refundable tax credit of as much as $5,000 per employee can be claimed – this year only – by firms that meet at least one of two conditions:
• The business is fully or partially suspended by government order because of COVID-19.
• Gross receipts are below 50 percent of the comparable quarter in 2019.
Firms that receive a loan through the Paycheck Protection Program are not allowed to claim the tax credit.
The credit is not limited to small businesses. Companies with more than 100 employees may only receive the credit for wages paid to employees who are “not providing services” because of the pandemic. Companies with 100 or fewer employees, though, may claim the credit even for employees who are not idled.
Reporting is done on a quarterly basis, and the IRS notes that, “In anticipation of receiving the credits, Eligible Employers can fund qualified wages by accessing federal employment taxes, including withheld taxes, that are required to be deposited with the IRS or by requesting an advance of the credit from the IRS.”