October 2020 Market Update
The economic recovery is looking less like a V.
Or even a U.
Although it is still moving in the right direction, the pace of recovery has slowed, with the economy adding 660,000 jobs in September, according to the Bureau of Labor Statistics, lowering the unemployment rate to 7.9 percent.
During a normal month, this would be a stellar number, but, of course, a normal month has not been seen for quite some time. After losing more than 20 million jobs in April (on top of 1.4 million in March) as a result of the pandemic lockdowns, the economy regained 2.7 million in May and 4.8 million in June. July and August combined for 3.3 million, but September’s number means the country has clawed back only about half of the positions that were lost in the spring.
In addition, many people are still losing their jobs. Initial jobless claims during the week ending Oct. 10 reached their highest level in seven weeks at 898,000, well above what had generally been expected by economists. Before the coronavirus hit, a typical week saw about 200,000 claims.
Federal Reserve Vice Chair Richard Clarida said on Oct. 14 that, while the COVID-19 downturn “was by far the deepest one in postwar history … it also may go into the record books as the briefest recession in U.S. history.”
That brevity notwithstanding, Clarida added that the economy will likely not return to its pre-pandemic size for another year, nor to its 3.5 percent unemployment rate of late 2019-early 2020 for an even longer time.
“While economic recovery since the spring collapse has been robust, let us not forget that full economic recovery from the COVID-19 recession has a long way to go,” Clarida said, adding, “It will take some time to return to the levels of economic activity and employment that prevailed at the business cycle peak in February, and additional support from monetary – and likely fiscal – policy will be needed.”
The Fed does not have a Federal Open Market Committee meeting scheduled for October, but it is expected to maintain an accommodative monetary policy by keeping the target range for the federal funds interest rate at 0 to 0.25 percent for the foreseeable future.
As for fiscal policy, efforts to enact relief legislation have stalled with House Democrats, Senate Republicans and the Trump White House unable to reach agreement on another package of business assistance and consumer stimulus. Treasury Secretary Steven Mnuchin, during an appearance on CNBC on Oct. 15, expressed doubt that a deal would be completed before Election Day on Nov. 3.
“We’re going to keep trying,” said Mnuchin, who has been the administration’s lead negotiator with Congress on the matter. “Don’t want to say not likely but there are significant issues.”
According to the minutes of the September 15-16 Federal Reserve meeting, the central bank’s board members observed that, “with the reopening of many businesses and fewer people withdrawing from social interactions, consumer spending was rebounding sharply and appeared to have recovered about three-fourths of its earlier decline.” This is consistent with recent measures of consumer confidence, as The Conference Board’s Consumer Confidence Index recorded a nearly 15-point increase in September to 101.8. (The index exceeded 130 early in the year.)
“A more favorable view of current business and labor market conditions, coupled with renewed optimism about the short-term outlook, helped spur this month’s rebound in confidence,” the board’s senior director of economic indicators said. “Consumers also expressed greater optimism about their short-term financial prospects, which may help keep spending from slowing further in the months ahead.”
The University of Michigan’s Index of Consumer Sentiment, meanwhile, reached a six-month high of 80.4 in September, up from 74.1 in August.
“While consumers have anticipated gains in the national economy ever since the April shutdown, the September survey recorded a significant increase in the proportion that expected a reestablishment of good times financially in the overall economy,” the survey’s chief economist said. “The recent gains are encouraging even though they were largely due to upper income households. Indeed, the data indicate that lower income households face continued income and job losses compared with the modest gains expected by upper income households.”
Confidence in the manufacturing sector largely held steady in September. After four months of gains, the Institute for Supply Management’s Purchasing Managers Index dipped less than a point to 55.4. Notably, this is higher than the 50.1 recorded in February, the month before lockdowns were implemented. Of 18 industries surveyed, 14 reported growth.
“Survey Committee members reported that their companies and suppliers continue to operate in reconfigured factories and are becoming more proficient at maintaining output,” the chair of the institute’s Manufacturing Business Survey Committee said. “Panel sentiment was optimistic (2.3 positive comments for every cautious comment), an improvement compared to August.”
The National Association of Home Builders Housing Market Index reached an all-time high of 83 in September. The index, which has been measured for 35 years, fell to 30 in April before steadily recovering. The association’s chief economist cautioned that spiraling lumber prices could slow expansion in the housing market, but added, “That said, the suburban shift for home building is keeping builders busy, supported on the demand side by low interest rates. In another sign of this growing trend, builders in other parts of the country have reported receiving calls from customers in high-density markets asking about relocating.”
The Dow Jones Industrial Average closed September at 27,781.70, down 2.4 percent on the year, but up nearly 50 percent since it bottomed out on March 23. The S&P 500 Index ended September at 3,363, 4 percent higher than it started the year.
The dollar on Sept. 30 was trading at 0.85 euros, 0.77 pounds, 105.59 yen and 6.79 yuan.
The United States is about to get some good economic news. In fact, on paper, it will be the greatest economic news in the nation’s history. The Bureau of Economic Analysis is to announce the growth rate for the third quarter on Oct. 29, and that number is certain to be huge – likely an annualized rate of around 25 to 30 percent. But this, of course, comes after a quarter in which the shuttered economy shrunk at an annualized rate of 31.4 percent. On Wall Street, a big loss in the market is often followed by a day of significant gains, with the upswing termed a “dead cat bounce,” because even a dead cat, if dropped from high enough, will bounce back up a bit after hitting the ground. The strong Q3 numbers that are expected might be a sign that, despite all the challenges, this year will end strong and there is reason to be optimistic about 2021. Or they might mean that the economy has something in common with a deceased feline.
October 2020 Steel Shorts
Brookings Bashes Trump Tariffs
Tariffs imposed by the Trump administration have had few, if any, benefits, a recent report from the Brookings Institution concludes.
The United States collected $79 billion in tariffs in 2019, about double the amount in 2017, and the report notes that, while the White House insists that companies paid these levies, “multiple studies suggest this is not the case: the cost of tariffs have been borne almost entirely by American households and American firms, not foreign exporters. While estimates vary, economic analyses suggest the average American household has paid somewhere from several hundred up to a thousand dollars or more per year thanks to higher consumer prices attributable to the tariffs.”
The report goes on to debunk three claims made by tariff supporters: that they have benefitted American workers; that they have helped the United States negotiate better trade agreements; and, in the case of the Section 232 tariffs on steel and aluminum, that they have improved national security.
Regarding American workers, the report states that, “overall, when economists have attempted to add up the net effect of Trump’s tariffs on jobs, any gains in importing-competing sectors appear to have been more than offset by losses in industries that use imported inputs and face retaliation on their foreign exports.” On trade deals, “the threat of tariffs does not appear to have brought substantial gains to the U.S.” and “in the long run the tariffs likely also contributed to pushing other potential trade partners away.” And as for national security, “while there may be a case for ensuring domestic production capacity for [steel and aluminum], it isn’t clear tariffs are the best instrument (or that they even achieve this goal). These tariffs antagonized many of America’s closest security partners, particularly Canada, which undermined efforts to cultivate a broader multilateral alliance to challenge China.”
Drop in Global Steel Demand Smaller than Expected Because of China: Report
The global demand for steel is decreasing less than had been expected, but this is largely because of increasing consumption in China, according to the World Steel Association.
Worldwide, demand is forecast to shrink by 2.4 percent this year because of the pandemic, the association said in October. Four months earlier, the prediction was for a 6.4 percent contraction. This improvement, according to the chairman of the association’s Economics Committee, results from China’s “surprisingly resilient rebound,” which is expected to boost the nation’s steel consumption by 8 percent this year.
“In the rest of the world, we will see a sharp contraction of steel demand, both in developed and developing economies,” he said.
In the United States, demand is forecast to drop by 15.8 percent, with the association stating, “Recovery from the lockdown has been strong, aided by substantial government support measures. The manufacturing downturn was shorter and less acute than expected. However, the US is still struggling to control the virus’s spread, and the recovery momentum might taper off in the coming months.”
Global demand is projected to increase by 4.1 percent next year. Demand in the United States is forecast to grow by 6.6 percent in 2021.
Moody’s Investors Service, meanwhile, upgraded its outlook for the global steel industry in October from negative to stable.
“Demand for steel is improving on a resumption of production in important end markets and on stronger global economic data, particularly in China,” a Moody’s senior vice president said. “We expect operating conditions for steelmakers to continue to improve over the next 12 to 18 months, barring a resurgence of the coronavirus.”
Michigan Steelworkers Hurt by Tariffs, NBC Reports
Steelworkers in Michigan have been hurt by the Trump administration’s tariffs on steel, NBC News reported on Oct. 9.
The network noted that “higher steel prices resulting from the tariffs dented demand from the Michigan-based U.S. auto industry and other steel consumers.” It went on to state that the domestic steel industry has been “shedding jobs” since even before the pandemic and that the industry “now employs 1,900 fewer workers than it did when [President] Trump took office.”
The losses include 1,250 people losing their jobs at Great Lakes Works, and the story quotes the grievance committee chairman at the plant’s United Steelworkers Union chapter as saying, “I don’t see any policy that helped us. We are losing our damn jobs here.”U.S. Steel, which owns Great Lakes Works, continues to defend the administration’s tariffs, with a spokeswoman saying they “ensure the strength of America’s steelmaking capacity during this pandemic.”
U.S. Steel’s stock price has dropped about 80 percent since Trump announced in March 2018 that he would impose Section 232 tariffs on steel and aluminum.
Commerce Department Announces Steel Trade Enforcement Actions
The Commerce Department in September announced two steel trade enforcement actions.
• The department announced affirmative preliminary determinations in the antidumping duty investigations of imports of pre-stressed concrete steel wire from Argentina, Colombia, Egypt, the Netherlands, Saudi Arabia, Taiwan, Turkey and the United Arab Emirates.
• Commerce announced an affirmative preliminary determination in a countervailing duty investigation of imports of pre-stressed concrete steel wire strand from Turkey.
CTPAT Minimum Security Criteria Changes and Covid Pandemic have led to Loss of Members
The Customs-Trade Partnership Against Terrorism (CTPAT) program has been losing members through both program withdrawals and suspensions for failure to comply with program requirements. The primary issues appear to be the changes in the Minimum Security Criteria that members must meet, and changes in the finances and/or importing activities of many companies due to the Covid pandemic.
Customs and Border Protection (CBP) reported on CTPAT during a Virtual Trade Week program in early September. CTPAT still maintains about 1,400 total members, including importers, certain exporters, brokers, carriers, and other logistics providers. About 53.4% of U. S. imports by value are CTPAT certified, which is important to CBP as it allows the agency to focus on more problematic transactions. CBP would like to get back to previous program numbers and increase them if possible, so is working to identify the problems and issues facing participants, and to add benefits to bring back old and bring in new members.
CBP adopted new Minimum Security Criteria during 2019, giving participants an extended timetable to update their profiles on the CTPAT website responding to the new criteria. Among other concerns, new Criteria include Forced Labor and Wood Packaging Materials (WPM) modules.
Involuntary suspensions or removals from the program – some 53 during this fiscal year – have been due to the failure to update or respond to the new requirements. If not remedied in a timely manner, suspended companies will be removed from the program. There have also been issues on the southern border, where some CTPAT companies have been caught up in the massive increase in narcotics seizures. CBP works with those companies to develop training and communications to assist in reducing problems.
Attrition from voluntary withdrawals has, according to responses from those companies, been primarily due to financial and staff reductions responding to the pandemic, so that company resources are no longer sufficient; and to changes in import procedures or supply chains. It seems likely that the new Security Criteria have had some effect, but the extent is unclear.
One possible new benefit being considered includes some assistance in dealing with a withhold release order for goods made from forced labor. There is also some discussion on integrating the WPM module with pre-approvals by CBP and/or accredited inspectors at the time of shipment. Further efforts at mutual recognition of the new criteria by similar agencies of other countries are in process. CBP is similarly working to develop a virtual validation process, initially to replace and more long term perhaps supplement in person validations.
CTPAT remains an important part of CBP’s cargo security efforts. Members will continue to receive at least some benefits and special support, and integration of the importer self-assessment program into CTPAT is ongoing.
Steven W. Baker
AIIS Customs Committee Chair