September 2020 Market Update
The economic outlook for the United States and the world during 2020 has improved according to a report from the Organization for Economic Co-operation and Development (OECD), though the group cautioned that “the outlook is subject to considerable uncertainty.”
The OECD had projected in June that the U.S. economy would contract by 7.3 percent this year. In September, though, it revised that forecast to 3.8 percent shrinkage. This was the biggest adjustment among the G20 countries.
Globally, the OECD’s contraction forecast went from 6 percent to 4.5 percent. In China, where the coronavirus originated, the economy is now expected to grow by 1 percent this year. Negative growth of 2.2 percent had been predicted in June.
The improved outlook, according to the organization, is based on the fact that, following the economic shock of the first few months of the pandemic, “Output picked up swiftly following the easing of confinement measures and the initial re-opening of businesses.”
The report, however, frequently warned that conditions may change, and the word “uncertainty” appears 26 times in the 17-page document, including in the title.
“Growth prospects depend on many factors, including the magnitude and duration of new COVID-19 outbreaks, the degree to which current containment measures are maintained or reinforced and feed through to confidence, the time until an effective treatment or vaccine is deployed, and the extent to which significant fiscal and monetary policy actions support demand,” the report stated.
Although economic performance has improved with the end of full lockdowns, ongoing restrictions, such as physical distancing mandates and limits on the size of gatherings, will continue to “raise business costs, particularly in services sectors heavily reliant on social interactions.”
In 2021, the OECD foresees 4 percent growth in the United States and 5 percent worldwide. China’s economy is expected to expand by 8 percent.
During the second quarter of the year, gross domestic product in the United States shrunk by an annualized rate of 31.7 percent, according to the Bureau of Economic Analysis. The bureau, in August, revised its estimate from the 32.9 percent contraction that was calculated in July.
The U.S. economy has continued to claw back some of the more than 20 million jobs that were lost in the spring, as it added 1.4 million jobs in August, lowering the unemployment rate 1.8 percentage points to 8.4 percent, the Bureau of Labor Statistics announced. The country still has 7.8 million more unemployed people than it did in February.
“These improvements in the labor market reflect the continued resumption of economic activity that had been curtailed due to the coronavirus (COVID-19) pandemic and efforts to contain it,” the bureau stated. “In August, an increase in government employment largely reflected temporary hiring for the 2020 Census. Notable job gains also occurred in retail trade, in professional and business services, in leisure and hospitality, and in education and health services.”
About one-sixth of the new jobs in August were temporary positions with the Census Bureau.
The Federal Reserve, like the OECD, has become more optimistic in its economic projections, revising its forecast for the U.S. economy to a 3.7 percent contraction for 2020. In June, the Fed predicted 6.5 percent. Also, with the improvement in the labor market during recent months, it now expects the unemployment rate at the end of the year to be 7.6 percent, instead of the 9.3 percent that it foresaw in June.
To one’s surprise, the central bank left the target range for the federal funds rate unchanged at 0 to 0.25 percent during its Sept. 15-16 meeting.
Fed Chairman Jerome Powell said earlier in the month that “the economy’s going to need low interest rates, which support economic activity, for an extended period of time.”
“It will be measured in years,” Powell said. “However long it takes, we’re going to be there. We’re not going to prematurely withdraw the support that we think the economy needs.”
The Federal Reserve has long had an inflation target of 2 percent annually, with the expectation that if prices exceeded that level, interest rates would be raised to apply brakes to the economy. Powell said in August, though, that the central bank would accept inflation – which remained below the target even during the strong pre-pandemic economy – running higher than 2 percent “for some time.”
“Inflation that is persistently too low can pose serious risks to the economy,” Powell said. “Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.”
Notwithstanding some signs of economic recovery, consumer confidence remains shaky. The Conference Board’s Consumer Confidence Index declined by nearly 7 points to 84.8 in August. The index was at 132.6 in February.
“Consumer spending has rebounded in recent months but increasing concerns amongst consumers about the economic outlook and their financial well-being will likely cause spending to cool in the months ahead,” the board’s senior director of economic indicators said.
The University of Michigan’s Index of Consumer Sentiment, though, showed modest growth in August, rising 1.6 points to 74.1. In February, the index reached 101.
“The small August gain reflected fewer concerns about the year-ahead outlook for the economy, although those prospects still remained half as favorable as six months ago,” the index’s chief economist said.
Among manufacturers, confidence grew stronger in August, as the Institute for Supply Management’s Purchasing Managers Index recorded its fourth straight monthly increase to reach 56, its highest point in 21 months. Of 18 industries surveyed for the index, 15 reported growth.
“The [manufacturing] sector continued its recovery in August, the first full month of operations after supply chains restarted and adjustments were made for employees to return to work,” the chair of the institute’s Manufacturing Business Survey Committee said. “Survey Committee members reported that their companies and suppliers operated in reconfigured factories, with limited labor application due to safety restrictions. Panel sentiment was generally optimistic (1.4 positive comments for every cautious comment), though to a lesser degree compared to July.”
Housing starts in July increased 22.6 percent from June and were 23.4 percent higher than the July 2019 level, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales jumped 24.7 percent in July, the National Association of Realtors reported, with the group’s chief economist saying, “The housing market is well past the recovery phase and is now booming with higher home sales compared to the pre-pandemic days. With the sizable shift in remote work, current homeowners are looking for larger homes and this will lead to a secondary level of demand even into 2021.”
The Dow Jones Industrial Average closed August at 28,430.05, almost exactly where it started the year. The S&P 500 ended the month at 3,500.31, up 8.3 percent year to date.
The dollar on Aug. 30 was trading at 0.84 euros, 0.78 pounds, 105.69 yen and 6.81 yuan.
As the OECD report made clear, “uncertainty” is the key word when gauging the economy now. With no precedent for how the national, much less global, economy recovers from a voluntary recession, forecasts amount to little more than guesses, especially with prospects for a vaccine unable to be measured and mandates that survived the lockdowns limiting the economy’s potential growth to an ever-changing degree. Meanwhile, it is becoming clearer that pandemic countermeasures are imposing serious costs of their own. Globally, the virus and the economic, social and logistical restrictions meant to contain it are expected to cause an additional 140 million people to live in extreme poverty, according to the International Food Policy Research Institute, and to almost double the number of people facing acute food insecurity to 265 million, according to the World Food Programme. And in the United States alone, school closures resulted in children’s advocacy centers identifying and serving 40,000 fewer abused children during the first half of the year, the National Children’s Alliance reported, and have the potential to cut lifetime earnings of children who are being kept at home and to reduce GDP during their lifetimes by $14 trillion, or much more if closures continue. At some point, health officials – not to mention political leaders – will have to consider whether focusing exclusively on the spread of a virus with a fatality rate well under 1 percent and excluding consideration of the second and third-order effects of interventions may be inconsistent with the best known rule in medicine: First, do no harm.
September 2020 Steel Shorts
U.S. Adopts New Steel Import Monitoring Rules
The Department of Commerce in September adopted changes to the Steel Import Monitoring and Analysis (SIMA) system in an attempt to enhance its ability to identify circumvention and certain other violations of U.S. trade rules.
With the revisions, SIMA now, among other things:
• Requires applicants for steel import licenses to identify where the steel was melted and poured (in addition to existing country of origin requirements)
• Applies to all products subject to Section 232 tariffs
• Is extended indefinitely
• Codifies the existing low-value license requirement for certain steel entries up to $5,000
A new online platform that is expected to be available starting Oct. 13 will, according to the Commerce Department, “offer free, modern data analytic tools to the public for performing detailed, customized data analysis. These tools will aid in the identification of changing trade patterns and surges in U.S. imports of steel products.”
“These significant improvements to SIMA will enable Commerce and the public to more readily identify transshipment and circumvention involving steel imports,” Secretary of Commerce Wilbur Ross said.
GAO Recommends Changes to Tariff Exemption Application Process
The Department of Commerce should improve the system that companies use to seek relief from Section 232 steel and aluminum tariffs, the Government Accountability Office (GAO) concluded in a report released in September.
Businesses who need steel and aluminum products that are not available domestically can apply for tariff exemptions. In an analysis of 106,000 such requests between March 2018 and November 2019, the GAO found that the Commerce Department rejected 19,000 “prior to decision due to incorrect or incomplete information. Although rejections may delay relief for requesters and can increase work for Commerce, the agency has not identified, analyzed, or taken steps to fully address the causes of these submission errors.”
In addition, the GAO said that Commerce did not make a decision on requests within its timeliness guidelines 79 percent of the time and, as of late 2019, had a backlog of 28,000 applications. As a result, Congress’ investigative arm recommended that the agency identify, analyze, and respond to factors in the process that may cause submission errors, as well as take steps to improve timeliness of exclusion request decisions and address the backlog.
Finally, the GAO reported that the Commerce Department has not measured the impact of tariffs and noted that, “Without assigning responsibility for conducting regular reviews and documenting the results, Commerce may be unable to consistently assess if adjustments to the tariffs are needed.” It recommended that the agency should assign responsibility for reviewing the tariffs’ impact and documenting the results.
The Department of Commerce concurred with all three recommendations.
U.S. Cuts Brazil’s Steel Import Quota
The Trump administration is reducing the amount of steel that will be allowed into the United States from Brazil this year.
Following the March 2018 announcement of 25 percent tariffs on steel imports under Section 232, the two countries reached an agreement that exempts Brazil from the tariffs in exchange for a limit on steel imports from that nation.
In an Aug. 28 proclamation, President Trump noted that, “The United States steel market has contracted in 2020” and, while “imports from most countries have declined this year in a manner commensurate with this contraction, … imports from Brazil have decreased only slightly.” As a result, the countries negotiated an agreement to cut the amount of steel the United States will import from Brazil during the remainder of 2020.
The proclamation allows the Commerce Department to grant exemptions “in certain limited circumstances.”
Commerce Department Announces Ruling
The Department of Commerce on Aug. 25 announced an affirmative preliminary determination in a countervailing duty investigation of imports of non-refillable steel cylinders from China.
The value of imports of such products from China in 2019 totaled about $71.8 million.
A final determination is expected by Jan. 7, 2021. If it is affirmative, the International Trade Commission will make an injury determination by Feb. 22, 2021.
Steel Import License Changes include Identifying Country where Steel is “Melted and Poured”
The Steel Import Monitoring and Analysis System (SIMA) administered by the Department of Commerce will be modified effective October 13, 2020. The major change is the requirement that the country where the steel was “melted and poured” be identified in the license application. Other changes include adding coverage for eight additional HTSUS numbers in order to align the license system with the coverage of Section 232 for basic steel mill products; increasing the low-value license to $5,000 and allowing multiple uses; clarifying the reporting and aggregating of certain information in the SIMA monitor; and extending the SIMA program indefinitely. The Final Rule setting forth these changes was published in the Federal Register on September 11, 2020. https://www.federalregister.gov/documents/2020/09/11/2020-19753/steel-import-monitoring-and-analysis-system
SIMA handles both the issuance of import licenses for basic steel mill products, required for entry of the products into the Unites States, and the monitoring system that publishes certain aggregate data on projected imports secured from those licenses. In addition to the changes listed above, modifications not requiring formal regulatory change will include a new modernized website (which will require users to re-register); establishing several new product reporting groups, including separating slab from other semi-finished steel, new line pipe groups for different diameter pipe, and a new “other rails and railroad accessories” group (this will increase the number of reporting groups from the current 53 to 58); and reporting of the data based on the “melted and poured” requirement. Data will continue to be aggregated sufficiently to protect proprietary information. The “melted and poured” data will be retained for a longer time period as it is not also reported in Census data.
The new requirement for information on the country where steel is “melted and poured” is related to the new requirements in the USMCA, where Mexico, Canada and the US have agreed to monitor and, eventually, limit duty preferences, particularly for steel used in automobile manufacturing, based on the country of “melt and pour.” The new rule establishes a definition for “melted and poured” as “the original location where the raw steel is: (A) First produced in a steel-making furnace in a liquid state; and then (B) Poured into its first solid shape. … The first solid state can take the form of either a semi-finished product (slab, billets or ingots) or a finished steel mill product.” The reporting requirement does not apply to raw materials used in steel manufacturing. The information on the country of “melt and pour” will ordinarily be shown on the mill test certificates required to be presented to Customs on all basic steel mill product imports. Producers should review their documents to be certain that information is clear. The requirement applies even if the product imported into the U. S. has undergone several intermediate processing steps, possibly in more than one country, and possibly resulting in a change in the country of origin for the finished product.
The new required information on the country of “melt and pour” may also be found useful in considering or investigating transshipment, circumvention, and/or evasion in AD/CVD cases.
The existing SIMA website used to secure steel import licenses will shut down on October 9, 2020, and the new site will open on October 13, 2020. There will be only a limited availability for manual license processing during the interim. The Commerce Department will provide instructions and demos on the new system; see https://www.trade.gov/updates-steel-import-licensing .
Steven W. Baker
AIIS Customs Committee Chair