AIIS: January 2017 Market Update

AIIS - The economy recorded its strongest performance in two years during the third quarter, with gross domestic product (GDP) growth reaching an annualized rate of 3.5 percent, according to the latest estimate from the Bureau of Economic Analysis (BEA).

In October, the BEA put Q3 growth at 2.9 percent, then it revised that number up to 3.2 percent at the end of November, leading to December’s third and final revision. Growth during the first two quarters of the year was 0.8 percent and 1.4 percent.

The unemployment rate in December, meanwhile, inched up a tenth of a point from November – when it was at its lowest point since August 2007, just before the Great Recession – to 4.7 percent, as the economy added 156,000 jobs during the month, the Bureau of Labor Statistics reported. The labor force participation rate also increased 0.1 percentage points to 62.7 percent, 1 point less than four years earlier and 3.7 points less than 10 years earlier.

The combination of solid quarterly GDP growth and a consistently strong labor market convinced the Federal Reserve Federal Open Market Committee to boost the target federal funds rate a quarter point to 0.5-0.75 percent. This was only the second rate increase in the past decade and the first in a year. The Fed had been stymied in its efforts to boost rates to “normal” levels since the previous hike by sluggish GDP expansion during the first half of 2016.

“Economic conditions are not far from the Federal Reserve’s dual mandate of maximum sustainable employment and price stability,” New York Federal Reserve Bank President and CEO William Dudley said before the committee’s meeting. “And I expect that we will make further progress toward these goals in 2017. So, from a cyclical perspective, the economy is in reasonably good shape.”

The upward revision to the GDP number resulted in part from an increase in the gauge of consumer spending growth to 3 percent, up from the 2.1 percent that was estimated in October, though this was still down from 4.3 percent in the second quarter. Consumer spending accounts for about 70 percent of the nation’s economic activity, and consumer confidence appears to be growing. The Conference Board reported that confidence rose sharply in both November and December, reaching 113.7 just before the end of 2016. (The index’s baseline is 100 in the year 1985.) The University of Michigan also reported an increase in consumer confidence since the election, and researchers attributed the boost in its Surveys of Consumers to the election of Republican Donald Trump.

“The surge was largely due to consumers’ initial reactions to Trump’s surprise victory,” the survey’s chief economist said after a sharp November increase that held steady in December. “When asked what news they had heard of recent economic developments, more consumers spontaneously mentioned the expected positive impact of new economic policies than ever before recorded in the long history of the surveys. To be sure, an equal number volunteered negative judgments about prospective economic policies, but the frequency of those negative references was less than half its prior peak levels whereas positive references were about twice its prior peak.”

Confidence among manufacturers has also been showing gains, with the Institute for Supply Management’s Purchasing Managers Index rising from 51.9 in October to 53.2 in November to 54.7 in December, its highest level of the year. (Any result above 50 indicates expansion in the manufacturing sector.) This was the fourth consecutive monthly increase. Of 18 manufacturing industries surveyed, 11 reported growth.

Housing starts fell 18.7 percent from October to November, when they were 6.9 percent below the level of a year earlier, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales, however, rose 0.7 percent from October to November, the National Association of Realtors reported. The median price for existing homes in November was $234,900, up 6.8 percent from a year earlier.

“The healthiest job market since the Great Recession and the anticipation of some buyers to close on a home before mortgage rates accurately rose from their historically low level have combined to drive sales higher in recent months,” the association’s chief economist said. “Furthermore, it’s no coincidence that home shoppers in the Northeast – where price growth has been tame all year – had the most success last month.”

Car sales in December were 4.7 percent lower than they were in December 2015, while light-duty truck sales were 8.3 percent higher, according to Motor Intelligence. Year-to-date, car sales were down 8.1 percent, while light-duty truck sales were up 7.2 percent.

The Dow Jones Industrial Average rose more than 1,600 points during the last two months of the year and closed 2016 at 19,762.60, just over 200 points off the record high set Dec. 20. The S&P 500 Index also closed the year strongly, adding 112 points during November and December and closing at 2,238.83 on Dec. 30, slightly less than its highest-ever close 10 days earlier.

The dollar closed out a strong year trading at 0.95 euros, 0.81 pounds, 116.97 yen and 6.94 yuan.

While many of the economic numbers look good, caveats remain. Much of the Q3 growth came from inventory investments and inordinately large exports of soybeans, neither of which the economy will likely regularly replicate. This even led some analysts to shy away from positive interpretations of the GDP estimate, but it clearly was not enough to scare the Federal Reserve away from an interest rate increase. A New York Times article noted that, even though estimates of future growth tend to be in the 2 percent range, “Fed officials say the economy is already expanding at something close to its maximum sustainable pace,” something that New York Fed President Dudley hinted at in his comments quoted above. This would mean that even a moderately strong economy in 2017 will likely spur several rate increases, and it would make consistent growth of 3-4 percent – which President-elect Trump has set as a target – almost impossible to achieve. Even if Trump gets his tax cut and infrastructure spending proposals through Congress and those measures stimulate growth, the Fed will likely boost rates in order to prevent the economy from “overheating.” In the same article, the Times summed up the Fed’s approach by quoting former Chairman William McChesney Martin Jr., who said more than 60 years ago, “The Fed’s job is to remove the punch bowl just as the party gets going.”

January 2017 Steel Shorts

Buy America Requirement Splits GOP

Congressional Republicans and President-elect Donald Trump appear to be staking out different positions on Buy America requirements.

Trump, who made promises to enact protectionist trade policies and bring manufacturing and industrial jobs back to the United States central to his campaign, said in December that his “administration will follow two simple rules. Buy American and hire Americans.”

In late 2016, though, House Republican leaders stripped a “Buy America” provision from legislation that passed the Senate in September. The Senate voted 95-3 to pass the “Water Resources Development Act” (S. 2848), which included a measure requiring that iron and steel products used in projects funded by the Drinking Water State Revolving Fund be made in the United States. Speaker of the House Paul Ryan, R-Wisc., and other House GOP leaders, however, removed that provision from the bill before it could be taken up by the House.

Twenty-five senators – including one Republican, Rob Portman of Ohio – wrote to leaders of the House and Senate about the requirement and to urge them “to ensure that it is included in the final WRDA bill.”

“Without domestic content requirements, foreign companies will reap the advantages of U.S. taxpayer spending at the expense of taxpaying U.S. iron and steel producers and workers across the country,” the letter stated. “An opportunity to support and grow U.S. manufacturers will be squandered.”

The legislation did not pass before the last Congress adjourned, but the “Buy America” issue is likely to return during the 115th Congress that was seated in January. A spokesman for Portman said that, “Senator Portman is confident we’ll have a better chance at including such a provision in legislation this Congress with support of the Trump administration.”

U.S. Steel CEO Forecasts Job Gains

The head of the nation’s largest steel producer recently forecast the addition of 10,000 steel jobs in the United States.

With Republican Donald Trump set to be inaugurated as president in January, domestic steel makers are optimistic that, as he promised during the campaign, he will help their industry with “America First” trade and tariff policies, as well as pro-business approaches to taxes and regulations.

U.S. Steel CEO Mario Longhi said on CNBC that, “when you see, in the near future, improvement to the tax laws, improvements to regulation, those two things by themselves may be a significant driver to what we’re going to do.”

“I’d be more than happy to bring back the employees we’ve been forced to lay off during that depressive period” after the Great Recession, he said, adding that this “could be close to 10,000 jobs.”

CNBC reported that U.S. Steel later clarified in a letter that Longhi was “referring to the American steel industry overall, not just to employees of United States Steel Corporation.”

Yearly Steel Exports from China Drop for 1st Time in 7 Years

Steel exports from China in 2016 declined by 3.6 percent from the previous year, the first annual decline since 2009.

Bloomberg reported that exports “are sliding as mills divert sales to the more lucrative domestic market, where stimulus measures have fueled demand.” The Wall Street Journal, meanwhile, stated, that “supplies from the world’s largest producer were wilting under a barrage of trade measures by other countries.”

China produces about half of the world’s steel, and multiple countries, including the United States and members of the European Union, have accused it of over-producing and exporting its excess at below-market prices, which has led to those nations imposing antidumping duties on Chinese exports.

Most recently, the European Union has launched a new investigation into Chinese exports of certain corrosion-resistant steel following a complaint from Eurofer, the European steel association.

Chinese officials have expressed a “high degree of attention and concern” regarding the investigation and said that the European Union “should not adopt mistaken trade protectionist measures that limit fair market competition.”

Department of Commerce Announces Preliminary Determinations in 2 Cases

The Department of Commerce in November announced preliminary determinations in two trade cases involving steel imports.

Commerce on Nov. 7 announced affirmative preliminary determinations in antidumping duty investigations of imports of certain carbon and alloy steel cut-to-length plate from Austria, Belgium, China, France, Germany, Italy, Japan, South Korea and Taiwan. Dumping margins were as high as 130.63 percent for one Italian company.

Final determinations from the department are expected by Jan. 18 for the China investigation and by March 29 for the others.

On Nov. 22, Commerce announced a preliminary determination in a countervailing duty investigation of imports of finished carbon steel flanges from India. Subsidy rates ranged from 2.76 percent to 3.66 percent.

A final determination is expected to be announced by April 11.

In all of the above cases, the International Trade Commission will make the final determination of injury to the domestic steel industry.

CUSTOMS CORNER

ACE Finally Arrives – Significant Changes to Many Processes

The Automated Commercial Environment (ACE), the primary system through which the trade community will report imports and exports and the government will determine admissibility, has been under development as a replacement for the Automated Commercial System (ACS) for many years. Most of its functions, including the filing of all Customs entries, have gone into effect and become mandatory. The final implementation date for remaining functions was supposed to be October 1, 2016, with integration of the other participating government agencies to be complete by the end of December.

Customs and Border Protection (CBP), in response to concerns expressed by the trade community, first announced the extension of mandatory transition for a number of post-release capabilities to October 29, and then further extended the date to January 2017. CBP also stated that those capabilities would be available, although not mandatory, not later than September 30. These capabilities include liquidation, drawback, reconciliation, duty deferral, collections, statements, and the automated surety interface. The trade concerns were based on the inability of commercial systems providers to develop the necessary software due to the late release of final programming criteria. The implementation date for these capabilities was announced as January 14, 2017.

Most importers that use customs brokers to file entries have had little direct impact from ACE, as the direct changes have primarily affected entry filers. There are and will be more indirect impacts affecting importers, from the already in place Post Summary Corrections (PSCs) replacing Post Entry Amendments (PEAs) to the upcoming changes in notification of liquidations and extensions or suspensions of entries. Importers using drawback, reconciliation, and duty deferrals such as temporary import bonds (TIBs) will have to learn and adopt new procedures. Some changes will require importers to use the ACE Portal to communicate with CBP.

The ACE Portal, although reportedly somewhat difficult to navigate, does provide importers with access to a great deal of information both about the importer’s interactions with CBP, and about CBP operations in general. Importers can generate reports on entries, liquidations, classifications, ports and brokers used, and can develop a wide range of analyses. Use of the ACE Portal for communication is required for importers that choose to be partnership level members of the new Centers for Excellence and Expertise (CEEs). The Portal is now also the sole electronic means for filing Protests (paper Protests are still permitted but may experience some processing delays).

The liquidation capabilities in ACE involve some significant processing changes, and an end to the historical practice of posting liquidations in the Customhouse at the port of entry as the official legal form of notification. This will be replaced with an electronic bulletin notice; it will be available, unlike many other features, without requiring an importer to have an ACE account. Notifications of extension and suspension of liquidation will no longer be printed, but instead posted to the electronic bulletin. Temporary Import Bond (TIB) extensions will now also be processed through ACE, with automatic extensions granted unless specifically denied by CBP.

The ACE system updates Customs entry processing capability; provides new data analysis tools to both Customs and the trade community of brokers, importers and exporters; and makes a number of changes in procedures and reporting requirements. Importers can continue to rely on Customs brokers, as in the past, for entry filing and related activities. They must become aware, however, of the changes that affect their specific operations. Importers should also consider how to best make use of the information and data analysis capabilities of ACE.

Steven W. Baker

AIIS Customs Committee Chair

swbaker@swbakerlaw.com