June 2020 Market Update
In the first bit of economic news in several months that qualifies as “good,” the economy added 2.5 million jobs in May, lowering the unemployment rate 1.4 percentage points.
The gains in May clawed back a small portion of the job losses that have resulted from the coronavirus lockdown that started in March. In April, alone, 20.5 million jobs were lost, pushing the unemployment rate to 14.7 percent. More losses were expected in May – 8.3 million, according to some forecasters – and the unemployment rate was projected to jump to nearly 20 percent. Limited reopenings around the country, however, added enough jobs to reduce the rate to 13.3 percent. This is still far higher than the 10 percent during the worst of the Great Recession, but well below the 25 percent suffered during the Great Depression.
Although it may not be as far below as it first appears. The Bureau of Labor Statistics noted in its May report that a data collection error resulted in the unemployment rate being understated by as much as 3 percentage points in April and May. This has led to some charges that the Trump administration intentionally released inaccurate data, an accusation that the bureau’s commissioner dismissed as “really absurd.” The job gains from April to May are not in dispute.
The Federal Reserve indicated in early June that it expects the unemployment rate to barely sink below double digits this year. The central bank is forecasting a 9.3 percent rate at the end of 2020 and a 6.5 percent rate a year later. As recently as February, the unemployment rate was 3.5 percent. When asked at a press conference how many of the job losses from recent months he expects to be permanent, Fed Chairman Jerome Powell said, “I don’t want to give you a number because it’s going to be a guess, but [there may be] well, well into the millions of people who don’t get to go back to their old job and in fact … there may not be a job in that industry for them for some time.”
The Fed in June announced that it was keeping the target range for the federal funds interest rate unchanged at 0 to 0.25 percent and that it “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 Bureau of Economic Analysis in late May revised its estimate of first quarter economic performance slightly downward, calculating that the economy shrank by 5 percent from January to March. It was the biggest quarterly hit to the country’s gross domestic product (GDP) since the Great Recession, even though the full effects of the lockdown were not felt until the second half of March. Predictions regarding the April to June period have involved what would be a historic level of contraction – as high as 30 percent, according to some economists – though the surprising job growth in May suggests that, while the numbers will definitely be bad, the worst case scenario may be avoided.
In part, this will be determined by whether states continue to reopen if they experience increases in coronavirus cases and deaths. The country largely began to ease the lockdown in May and nearly half the states have been seeing more cases in recent weeks, though, to some extent, this is a function of increased testing. Nationwide, more than three times as many people were being tested each day ruing the first week of June than were tested during the first week of April. More troubling is that some areas are experiencing an increase in virus-related hospitalizations, which some public health officials link to reopening, in general, and Memorial Day festivities – and accompanying breakdowns in social distancing and mask wearing – in particular. The recent protests concerning police use of force may also add to the numbers. On a country-wide basis, though, deaths from COVID-19 have declined steadily since mid-April, with neither open businesses nor the holiday weekend appearing to slow the trend. In mid-June, the 7-day rolling average of deaths per day stood at a little over 700, down from more than 2,200 two months earlier.
With businesses starting to reopen and some people going back to work, confidence in the economy is inching back up, though wariness certainly remains. The Conference Board’s Consumer Confidence Index – which plummeted by more than a third from March to April – increased by 0.9 points to 86.6 in May.
“Short-term expectations moderately increased as the gradual reopening of the economy helped improve consumers’ spirits,” the board’s senior director of economic indicators said. “However, consumers remain concerned about their financial prospects. In addition, inflation expectations continue to climb, which could lead to a sense of diminished purchasing power and curtail spending. While the decline in confidence appears to have stopped for the moment, the uneven path to recovery and potential second wave are likely to keep a cloud of uncertainty hanging over consumers’ heads.”
The University of Michigan Index of Consumer Sentiment increased from 72.3 in May to 78.9 in June. (It stood at 101 in February.)
“The turnaround is largely due to renewed gains in employment, with more consumers expecting declines in the jobless rate than at any other time in the long history of the Michigan surveys,” the survey’s chief economist said. “Despite the expected economic gains, few consumers anticipate the reestablishment of favorable economic conditions anytime soon. Bad times financially in the economy, as a whole, during the year ahead were still expected by two-thirds of all consumers, and a renewed downturn was anticipated by nearly half over the longer term.”
Among manufacturers, the Institute for Supply Management’s Purchasing Managers Index (PMI), which is based on a survey of supply executives, crept up from 41.5 in April to 43.1 in May. According to the institute’s methodology, a reading below 50 indicates contraction in the manufacturing sector, but one above 42.8 is a sign of expansion in the overall economy. Of 18 sectors surveyed, six reported growth.
“Three months into the manufacturing disruption caused by the coronavirus (COVID-19) pandemic, comments from the panel were cautious (two cautious comments for every one optimistic comment) regarding the near-term outlook,” the chair of the institute’s Manufacturing Business Survey Committee said. “As was the case in April, the PMI indicates a level of manufacturing sector contraction not seen since April 2009. However, the trajectory improved.”
Stocks have been rallying since hitting a recent low three months ago, with the Dow Jones Industrial Average gaining more than 36 percent since March 23 to end May at 25,383.11. The S&P 500 Index experienced similar gains and closed May at 3,044.31.
On May 31, the dollar, which has remained strong throughout the pandemic, was trading at 0.90 euros, 0.81 pounds, 107.74 yen and 7.13 yuan.
As some governors slow down reopening plans following increases in coronavirus cases in their states, Treasury Secretary Steven Mnuchin is warning against another full-scale economic freeze. “We can’t shut down the economy again,” Mnuchin said on CNBC. “I think we’ve learned that, if you shut down the economy, you’re going to create more damage.” Even if the drastic measures implemented from March to May are not repeated, though, fear could continue to be a drag on the economy, as Americans avoid many of their once normal activities, even if they are officially permitted. This could mean a slower recovery than had been hoped – one that some are describing as being shaped like a Nike swoosh. There also remains the possibility that economic gains this summer could be erased by a second wave of the outbreak in the fall and winter. The good news is that Dr. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, told The Telegraph in June that, “It is not inevitable that you will have a so-called ‘second wave’ in the fall or even a massive increase if you approach it in the proper way.” The bad news is that “the proper way” involves continuing to restrict many activities for a period of time “more likely measured in months rather than weeks.” Even if the worst is avoided, true economic confidence and recovery may not arrive until a vaccine or effective treatment does.
|June 2020 Steel Shorts|
|NAFTA Replacement to Take Effect on July 1|
The trade pact that will replace NAFTA is just days away from going into effect.
The United States-Mexico-Canada Agreement (USMCA) will become effective on July 1. The U.S. Trade Representative on June 3 released uniform regulations to implement the pact, including the Rules of Origin regulations that detail, among other things, the new requirements regarding North American steel content in vehicles.
The USMCA addresses topics and technologies that have emerged since the North American Free Trade Agreement (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 (NAFTA contained no such provision)
• 75 percent of the overall content must be produced in North America (NAFTA set the threshold at 62.5 percent)
• 40 percent of car components and 45 percent of light truck 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.
European Steel Manufacturers Seek Reductions in Import Quotas
Steel manufacturers in Europe are urging regulators on the continent to reduce steel import quotas, warning that, “The European steel industry’s survival is at further, serious risk” because authorities have not adequately responded to the collapse in demand caused by the pandemic.
In a June 8 statement, Eurofer noted that steel demand has fallen 50 percent since March, and 40 percent of the industry’s workforce in the European Union has been laid off or is working reduced hours, even as China and other countries have maintained high levels of steel production.
“The imminent risk of cheap steel offers flooding the market would hamper our recovery and the survival of one of Europe’s strategic industries – one that sustains 2.6 million direct and indirect jobs in the EU,” Eurofer stated.
In 2018, the EU implemented “safeguard” tariffs – which are still in place – that are triggered when steel imports exceed a certain threshold. This was done in response to concerns that the tariffs imposed by the United States would lead steel-producing countries to dramatically increase their shipments to Europe. Now Eurofer wants regulators to undertake “a crisis-oriented review” of the safeguards and to set a quota level “that reflects actual market conditions.”
“The import quotas should be reduced considerably, and the transfer of unused quotas to subsequent quarters and the access to the residual quotas for countries with their own quotas prevented,” the organization stated.
China to Increase Steel Dominance: Financial Times
According to Financial Times, “The coronavirus pandemic is putting China on course to dominate global steel production to an even greater extent than ever before.”
China produced about 54 percent of all of the steel manufactured worldwide last year, but in April of this year – amid the global economic shutdown – that number jumped to 62 percent.
Financial Times noted that China increased its share of global production during the last major financial crunch, the Great Recession, jumping from 38 percent in 2008 to 47 percent in 2009. Even amid this year’s outbreak – and a shrinking economy in the first quarter – it has reportedly kept steel mills running, in some cases at a faster pace than before. Now, as the nation returns to normal, domestic demand is increasing.
“China is on the road to recovery,” an analyst with CRU told the publication. “The rest of the world is where there is a problem. The lockdown happened later and demand is poor.”
Commerce Department Announces Actions in Steel Import Cases
The Department of Commerce in May announced:
• Affirmative final determinations in antidumping duty and countervailing duty investigations of imports of collated steel staples from China
• Affirmative preliminary determinations in antidumping duty investigations of imports of forged steel fittings from India and South Korea
• Affirmative preliminary determinations in countervailing duty investigations of imports of forged steel fluid end blocks from China, Germany, India and Italy
• Self-initiation of an inquiry into possible circumvention of antidumping duty and countervailing duty orders on stainless steel sheet and strip from China that were completed in Vietnam before being sent to the United States
• Initiation of antidumping investigations of imports of prestressed concrete steel wire strand (PC strand) from Argentina, Colombia, Egypt, Indonesia, Italy, Malaysia, the Netherlands, Saudi Arabia, South Africa, Spain, Taiwan, Tunisia, Turkey, Ukraine and the United Arab Emirates, and a countervailing duty investigation of imports of PC strand from Turkey.
Pipe Spool Entry Reporting
U. S. Customs and Border Protection (CBP) has issued an update on proper entry/entry summary reporting for pipe spools with pipes from multiple countries. Pipe spools are described as “prefabricated components of a piping system consisting of various types of pipes, flanges, elbows, and fittings, and may contain line pipes and other components manufactured in multiple countries.” While the pipe spool itself is classified for tariff purposes in a single tariff provision, normally based on the pipes that predominate by weight and value contained in the spool with regular duties based on that classification, individual components of the pipe spool may also be subject to Section 232, Section 301, and/or AD/CVD duties based on each component’s country of origin.
If all components of a pipe spool come from a single country, only one line item need be reported. If the spool has components from two or more countries, however, the components must also be reported on separate entry lines to allow reporting of each applicable country of origin, and allow Section 232 duties or quota, Section 301 duties, and/or applicable AD/CVD duties to be reported. The actual value of each component must be reported on the appropriate entry line. Supporting documents in the form of invoices and other necessary materials must be filed to provide all necessary information.
CBP has attached a sample entry document to the Update demonstrating the correct and incorrect ways to file such entries/entry summaries. The Update is located at: https://content.govdelivery.com/accounts/USDHSCBP/bulletins/28cd221.
Importers should be aware that there are a number of other articles where components may individually be liable for additional duties under various trade remedy provisions, depending on the scope of individual Orders and Proclamations. Generally components that do not undergo a substantial transformation during incorporation into a larger product are more likely to be subject to these additional duties. See the rulings cited in the Update for additional details.
Steven W. Baker
AIIS Customs Committee Chair