July 2020 Market Update

Although employers continued to return some people to work in June, the economic outlook for the United States remains uncertain amid ongoing struggles with the coronavirus pandemic.

The economy added 4.8 million jobs last month, lowering the unemployment rate to 11.1 percent, the Bureau of Labor Statistics reported. Even combined with the 2.5 million jobs added in May, though, the gains remain far below the more than 20 million jobs lost in April, alone.

“These improvements in the labor market reflected the continued resumption of economic activity that had been curtailed in March and April due to the coronavirus (COVID-19) pandemic and efforts to contain it,” the bureau stated. “In June, employment in leisure and hospitality rose sharply. Notable job gains also occurred in retail trade, education and health services, other services, manufacturing, and professional and business services.”

President Trump lauded the numbers, saying, “It’s all coming back faster than we ever thought. … We didn’t wilt and our country didn’t wilt.”

Initial unemployment claims continue to be high, however, with 1.3 million people filing for benefits during the week ending July 4. But this is far less than the more than 5 million claims during some weeks in April and May. (During the two years before the pandemic, weekly jobless claims were typically in the low 200,000s. During the Great Recession, the four-week moving average of claims peaked at a little more than 650,000.)

The areas that were hardest hit by the virus this spring – New York City, for example, along with much of the northeast – are feeling much less of an impact now, while some regions that were spared – primarily the Sun Belt – are experiencing outbreaks. Across the country, newly reported cases during the second week of July exceeded 60,000 per day – double the number from three weeks earlier – with the weekly rolling average of daily deaths slightly increasing, for the first time in almost three months, to more than 600. (In mid-April, the rolling average reached 2,200 deaths per day). Florida, Arizona, Texas and California now account for about half of the nation’s new cases and deaths each day, with the Miami, Phoenix, Houston and Los Angeles areas accounting for a large part of those states’ totals. Some, but not all, of the growth in cases likely results from increased testing. However, several areas, including those cited above, are also reporting more hospitalizations and higher ICU bed occupancies.

All of this has led some areas to slow or reverse their reopening plans, and it prompted Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, to suggest that, “Any state that is having a serious problem, that state should seriously look at shutting down” like most places did in March and April.

Federal Reserve officials are expressing wariness about the state of the economy, with Fed Chairman Jerome Powell cautioning that, “A second outbreak could force government and force people to withdraw again from economic activity.” Federal Reserve Bank of Atlanta President Raphael Bostic, meanwhile, observed that, “The energy in terms of reopening for businesses and for just general activity is starting to level off. This is something we are definitely going to watch extremely closely.” Bostic also suggested that much depends on schools being able to reopen safely, since, “If parents can’t get child care and they are worried about those sorts of issues, they are not going to be as productive in the workplace. We are going to need to have some answers there if we want the recovery to happen in a smooth way.”

Federal Reserve Bank of Dallas President Robert Kaplan suggested a solution to the economic challenges during a July 9 appearance on Fox Business Network.

“If we all wore a mask, it would substantially mute the transmission of this disease and we would grow faster,” Kaplan said. “We would have a lower unemployment rate. We’d grow faster. And would be far less likely to slow some of our reopenings. … While monetary and fiscal policy have a key role to play, the primary economic policy from here is broad mask-wearing and good execution of these health care protocols.”

The Institute for Supply Management’s Purchasing Managers Index showed significant improvement in June, indicating growth in confidence among supply executives. The index rose from 43.1 in May to 52.6, marking the largest gain in four decades.

“June signifies manufacturing entering an expected expansion cycle after the disruption caused by the coronavirus (COVID-19) pandemic,” the chair of the institute’s Manufacturing Business Survey Committee said. “Comments from the panel were positive (1.3 positive comments for every one cautious comment), reversing the cautious trend which began in March.”

Of 18 industries surveyed, 13 reported growth in June. Only six did so in May.

Consumer confidence also increased in June, with The Conference Board’s Consumer Confidence Index reaching 98.1, up from 85.9 in May. The index was over 130 before the outbreak.“

Looking ahead, consumers are less pessimistic about the short-term outlook, but do not foresee a significant pickup in economic activity,” the board’s senior director of economic indicators said. “Faced with an uncertain and uneven path to recovery, and a potential COVID-19 resurgence, it’s too soon to say that consumers have turned the corner and are ready to begin spending at pre-pandemic levels.”

Another measure of consumer confidence also recorded significant gains, with the University of Michigan’s Index of Consumer Sentiment rising from 72.3 in May to 78.1 in June.

“While most consumers believe that economic conditions could hardly worsen from the recent shutdown of the national economy, prospective growth in the economy is more closely tied to progress against the coronavirus,” the survey’s chief economist said. “The early reopening of the economy has undoubtedly restored jobs and incomes, but it has come at the probable cost of an uptick in the spread of the virus. … The resurgence of the virus will be accompanied by weaker consumer demand among residents of the Southern and Western regions and may even temper the reactions of consumers in the Northeast.”

It should be noted that each of these confidence measures involved surveys of people over the course of a month in which conditions varied significantly. It is possible that respondents who expressed positive sentiments in early June may have felt their confidence wane after coronavirus cases began increasing in the middle of the month, and this would not be reflected in the results.

Housing starts in May were 4.3 percent higher than in April but 23.2 percent lower than in May 2019, the Census Bureau and the Department of Housing and Urban Development reported. Existing home sales fell 9.7 percent from April to May, according to the National Association of Realtors, though the group’s chief economist expressed confidence for the rest of 2020, saying, “Home sales will surely rise in the upcoming months with the economy reopening, and could even surpass one-year-ago figures in the second half of the year.”

The Dow Jones Industrial Average and the S&P 500 both held steady in June, closing the month at 25,812.88 and 3,100.29, respectively. Since the end of 2019, the Dow has dropped 9.3 percent, while the S&P has slipped 4 percent.

The dollar ended the month trading at 0.89 euros, 0.81 pounds, 107.78 yen and 7.07 yuan.

Even in normal conditions, economic forecasting can be more art than science. But these days, that art depends on science. Specifically, science’s answers to many questions, such as what COVID-19 will do, what approaches should be taken in response, and what the end game will be – if there is one. While cases have been rising sharply, there may still be some cause for guarded optimism. Most infected people are asymptomatic or have only mild reactions, and for serious cases, enhanced treatments, along with a greater understanding of how the virus works, may reduce the rate at which it kills. Simply knowing that the immunocompromised and the elderly are by far the most vulnerable – around 40 percent of deaths have been in assisted living facilities, about half have been people over the age of 80, and 80 percent or more have been over the age of 65 – should lead to more effective mitigation measures. In the end, though, the economy is a state of mind, and it will not return to normal until people feel safe doing all the things that, until March, they took for granted. And that may not happen without a vaccine.
July 2020 Steel Shorts
Supreme Court Declines to Hear Section 232 Appeal

The U.S. Supreme Court in June refused to hear AIIS’s challenge to the Trump administration’s Section 232 tariffs on steel, effectively ending the legal effort to have the levies struck down.

After decisions by the U.S. Court of International Trade and the U.S. Court of Appeals sided with the administration, AIIS appealed to the Supreme Court, arguing that the 2018 implementation of 25 percent tariffs on steel (and 10 percent on aluminum) under Section 232 of the Trade Expansion Act of 1962 was an unconstitutional violation of the separation of powers. The justices however, declined without comment to hear the case.

AIIS President Richard Chriss said immediately following the court’s announcement that the institute has “been guided by one principle: We speak out when the cause is right and the livelihoods of our members and steel supply chain colleagues are harmed.”

“Even though the Supreme Court did not today agree to accept our petition, our cause is still right,” Chriss said. “We reinvigorated a robust national conversation about the proper separation of powers in our system of ordered liberty. That conversation continues. Now it is up to Congress to place limits on presidential decision-making.”

U.S. Reportedly Considering Aluminum, Steel Tariffs on Canada

The Trump administration is thought to be considering reviving tariffs on aluminum and, possibly, steel imports from Canada.

The administration has noted an increase in such imports recently, U.S. Trade Representative Robert Lighthizer told the Senate Finance Committee in June, adding, “It’s something of genuine concern to us and that we are looking at.”

Canadian Prime Minister Justin Trudeau said he is “concerned” about the possibility of the tariffs being imposed “at a time of economic strain and stress,” a sentiment that he expressed to President Trump during a conversation on July 13.

“I impressed upon him that it would be a shame to see tariffs come between our two countries at a time where we’re celebrating [a renegotiated] NAFTA, at a time where we want our businesses or manufacturers to get going as quickly as possible, and we pledged to keep working on it together,” Trudeau said.

The United States imposed 25 percent tariffs on steel and 10 percent on aluminum imported from much of the world, including Canada, in 2018. Given that the rationale for the tariffs was national security, this produced consternation from the country that is America’s closest ally and biggest trading partner. The two nations reached an agreement to lift the tariffs last year. The pact allows for either country to impose tariffs if “imports of aluminum or steel products surge meaningfully beyond historic volumes of trade over a period of time.”

USMCA Takes Effect

The U.S-Mexico-Canada Agreement (USMCA) went into effect on July 1, replacing NAFTA.

President Trump, who had derided NAFTA as “perhaps the worst trade deal ever made,” lauded the new pact.

“The USMCA is the largest, fairest and most balanced trade agreement ever negotiated and contains innovative provisions to help grow the economy and support American jobs,” Trump said.

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.

Commerce Department Announces Affirmative Circumvention Ruling

The U.S. Department of Commerce on June 1 announced an affirmative circumvention ruling involving an antidumping duty order on imports of steel concrete reinforcing bar (rebar) from Mexico.

The Commerce Department determined that Deacero, a Mexican company, violated an antidumping duty order on rebar that is straight or coiled by exporting to the United States rebar that was bent at one or both ends.

“U.S. law,” the agency explained, “provides that Commerce may conduct a circumvention inquiry when evidence suggests that merchandise subject to an existing [antidumping duty] order undergoes a minor alteration that brings the product outside the literal terms of the scope of the order.”

Pest Issues Affect Sea Containers, Not Just WPM

The Animal and Plant Health Inspection Service (APHIS) of the U. S. Department of Agriculture, familiar from their role in regulation Wood Packaging Materials (WPM), is also concerned with reducing the pest risk of sea containers. The 12.5 million sea containers that enter the U. S. each year may contain inside “all life stages of invasive insects, mites, snails, and slugs … ready to infest a new location.” In addition, outside “container walls could be contaminated with insect egg masses, bird droppings, and soil containing weed seeds and disease-causing microbes.”

New Zealand made a proposal to the International Plant Protection convention (IPPC) to adopt a world-wide standard. That proposal was unable to gain acceptance. AHPIS is now working with Canada and Mexico in the North American Sea Container Initiative to establish similar goals. The Initiative is being administered by the North American Plant Protection Organization (NAPPO). At this point the voluntary initiative has developed recommended self-inspection practices for the industry. See https://nappo.org/english/nasci/.

APHIS hopes to leverage the North American Initiative, with the help of New Zealand and Australia, into a multi-national standard through IPPC. In the interim, the North American Initiative includes not only APHIS but also U.S. Customs and Border Protection, the U.S. Coast Guard, the Canadian Food Inspection Agency, and Transport Canada. Industry members include the World Shipping Council, Global Shippers Forum, International Cargo Handling Coordination Association, Institute of International Container Lessors, Freight Management Association of Canada, National Industrial Transportation League, and Agriculture Transportation Coalition.

APHIS has many of the same enforcement tools used with WPM – including quarantine and exclusion orders – available for contaminated containers. Shippers can avoid costs and delays by taking proactive steps to ensure pest free containers. A training video is available at http://nappo.org/english/nasci/video/.

Steven W. Baker

AIIS Customs Committee Chair

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