News from AIIS: May 2017 Market Update & Steel Shorts

The economy did not start off 2017 quite as slowly as initially estimated.

The Bureau of Economic Analysis (BEA) revised its measure of growth in the first quarter to an annualized rate of 1.2 percent, up from the 0.7 percent that the agency announced in April. Despite the change, the BEA noted that “the general picture of economic growth remains the same.”

“Increases in nonresidential fixed investment and in personal consumption expenditures were larger and the decrease in state and local government spending was smaller than previously estimated,” according to the bureau.

Consumer spending typically drives growth, accounting for about 70 percent of all economic activity, and consumers did not do much driving from January to March. Spending increased by just 0.6 percent during the first quarter, according to the BEA, though this was double the rate that the agency first estimated.

Analysts are expecting a much better second quarter, with some forecasting growth of 3 percent or more. If this is to happen, consumers will have to boost their spending. Data from April provided some encouragement, as consumer expenditures increased at a non-annualized rate of 0.4 percent from March, the BEA reported. The monthly rate was just 0.1 percent, 0.1 percent and 0.3 percent during the first three months of the year.

One reason to be cautious when forecasting, though, is that a leading measure of consumer confidence has dipped two months in a row. The Conference Board’s Consumer Confidence Index, which had stood at 124.9 in March was down to 117.9 in May (The index’s baseline is 100 in 1985.) “Looking ahead, consumers were somewhat less upbeat than in April, but overall remain optimistic that the economy will continue expanding into the summer months,” the board’s director of economic indicators said.

The University of Michigan’s May Index of Consumer Sentiment was largely unchanged from March and April at 97.1, as it “continued to move along the high plateau established following [President Donald] Trump's election.” In May 2016, the index was at 94.7. This index breaks down results by party affiliation, and it has regularly noted in recent months that “the partisan divide between Democrats and Republicans has also remained largely unchanged, with the first expecting a recession and the other more robust economic growth.”

“Partisanship is reflected by economic policy preferences,” the university stated. “Since no major policies, such as healthcare, taxes, or infrastructure spending have yet been adopted, the partisan divide may reflect differences in policy preferences expressed as expected economic outcomes. Thus, the extreme partisan divide may persist until passage is deemed either inevitable or impossible.”

In the manufacturing sector, confidence changed little from April to May, with the Institute for Supply Management’s Purchasing Managers Index increasing a tenth of a point to 54.9. (An index over 50 indicates growth in the sector.) Of 18 industries surveyed, 15 reported growth. The highest the index has been in the past year was 57.7 in February.

Job growth in May came in below expectations, with 138,000 positions created, but the unemployment rate still fell to 4.3 percent, its lowest rate in 16 years. This, however, had more to do with 429,000 people no longer seeking employment, pushing the labor force participation rate down to 62.7 percent. Ten years ago, the rate was around 66 percent, but it has dipped fairly steadily during the past decade because of both economic and structural factors – such as the retirement of baby boomers – and it has been mostly below 63 percent since late 2013.

Analysts have suggested a variety of explanations for the slowdown in job growth, from “political uncertainty in Washington” – suggested by a California State University economics professor, among others – to the economy simply approaching maximum employment. Reuters reported that, “There is growing anecdotal evidence of companies struggling to find qualified workers.”

This is only moderately reflected in wage growth, which has been between 2.5 and 2.9 percent during the past year. From 2007 to early 2009, monthly measures of wage increases (at an annualized rate) were between 3 and 3.5 percent, before they suddenly fell to below 2 percent and mostly stayed there until 2013.

Despite the economic indicators not being all positive, the Federal Reserve Federal Open Market Committee is expected by many analysts to increase interest rates at itsJune 13-14 meeting. The Fed last raised rates a quarter-point in March, bringing the target range for the federal funds rate to 0.75 to 1 percent. This was only the third time since the recession that the Federal Reserve has raised rates, and two or, even, three more hikes are anticipated this year.

Housing starts in April dipped 2.6 percent from March, but were slightly ahead of the April 2016 pace, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales, meanwhile, fell 2.3 percent from March to April, a result that the National Association of Realtors attributed to “stubbornly low supply levels.”

“New and existing inventory is not keeping up with the fast pace homes are coming off the market,” the association’s chief economist said. “Demand is easily outstripping supply in most of the country and it’s stymieing many prospective buyers from finding a home to purchase.”

Car sales have decreased sharply from last year, with May sales 9.3 percent below a year earlier and year-to-date sales down 11 percent compared to 2016, Motor Intelligence reported. Light-duty truck sales, however, were 6 percent higher in May than they were in May 2016, and year-to-date sales have increased 4.7 percent.

The dollar remains strong, and it ended May trading at 0.89 euros, 0.78 pounds, 110.59 yen and 6.8 yuan.

The Dow Jones Industrial Average has hovered around the 21,000 mark since the beginning of March, after rising 15 percent from Election Day until then. It ended May at 21,008.65. The S&P 500 Index closed the month at 2,411.80, just off a record high set a few days earlier. The S&P has generally followed the same trend line as the Dow since Nov. 8.

Trump on June 1 referred to the United States as having made “absolutely tremendous economic progress since Election Day. The economy is starting to come back, and very, very rapidly.” Even coming from a marketer known for using hyperbole, describing 1.2 percent growth as “rapid” can only be met with incredulity. Trump was elected, at least in part, to bring a businessman’s touch to the White House and to push for pro-growth policies. Tax reform, for example, could, indeed, be “absolutely tremendous” for the economy, but Trump has been burning energy and, more importantly, political capital by creating or exacerbating controversies, and this lack of focus will only make an already difficult legislative challenge even tougher. The mandate he claimed in January withers away a little more with each ill-advised tweet. Further, he is pursuing trade policies that will make strong economic growth essentially impossible to achieve. The protectionism that Trump favors could only work if domestic substitutes were available at the same price and quality as imported goods and if other countries declined to implement retaliatory measures. Needless to say, neither of these conditions would be true. It is understandable that many Americans without a background in macroeconomics fail to see the long-term negative effects of moving the country away from free trade, but it is unacceptable for a president – particularly one who literally wrote the book on business – to be so economically naïve.

May 2017 Steel Shorts

AIIS Delivers Comments at Section 232 Hearing

During a May 24 hearing regarding the Department of Commerce’s Section 232 investigation of steel imports, attorney Gary Horlick, speaking on behalf of AIIS, warned of the damage that can be done by protectionist policies.

President Donald Trump on April 20 issued a presidential memorandum directing the secretary of commerce to conduct an investigation “to determine the effects on national security of steel imports.”

Horlick noted that national security needs amount to only about 3 percent of all steel produced in the United States and said that “the government has full legal means to access what it needs.” Some critics have said that the investigation has more to do with shielding the domestic steel industry from foreign competition than with national security and Horlick, early in his remarks, stressed that Section 232 “was not intended to provide overall protection for U.S. industry.”

Horlick went on to describe how trade limits can have negative effects, as when restrictions on oil imports from 1959 to 1973 resulted, paradoxically, in the United States becoming a net importer of oil, drove up downstream costs for oil to as much as double foreign prices, and even contributed to the creation of the Organization of the Petroleum Exporting Countries (OPEC). In addition, he warned of “the certainty that other countries will retaliate against U.S. exports.”

“The important lesson that we can draw from this is that when contemplating using a statute like Section 232, we should treat it with extreme caution and concern for foreseeable and unforeseen consequences,” Horlick said. “This is especially true when the rationale for employing Section 232 appears to be entangled with political considerations for broad industrial policy goals.”

Although the Commerce Department has nine months to complete the investigation, Commerce Secretary Wilbur Ross said at the hearing that he hopes to have it finished by the end of June.

U.S. Officially Declares Intent to Renegotiate NAFTA

The United States trade representative on May 18 formally notified Congress that the Trump administration intends to renegotiate the North American Free Trade Agreement (NAFTA).

Negotiations can begin no fewer than 90 days after the delivery of the notification.

“The United States seeks to support higher-paying jobs in the United States and to grow the U.S. economy by improving U.S. opportunities under NAFTA,” U.S. Trade Representative Robert Lighthizer stated in the notification letter. Lighthizer was confirmed by the Senate to become the country’s lead trade negotiator by an 82-14 vote just a week earlier.

“We note that NAFTA was negotiated 25 years ago, and while our economy and businesses have changed considerably over that period, NAFTA has not,” Lighthizer wrote. “Many chapters are outdated and do not reflect modern standards. For example, digital trade was in its infancy when NAFTA was enacted.”

The letter referenced several other sectors for which the administration hopes to add provisions, including intellectual property rights, regulatory practices, state-owned enterprises, services, customs procedures, sanitary and phytosanitary measures, labor, environment, and small and medium enterprises.

President Donald Trump campaigned on an “America First” platform that rejected multi-lateral trade agreements. He regularly inveighed against NAFTA, calling it “the worst trade deal, maybe ever signed anywhere.” In late April, Trump said that he “was all set to terminate” the trade pact before Cabinet members talked him out of it and convinced him to renegotiate it instead.

U.S. Steel CEO to Retire

The head of U.S. Steel announced in May that he is retiring.

Mario Longhi started at U.S. Steel in 2012 and has served as CEO since 2013. His retirement will be effective on June 30 and until then, the company announced, “he will remain on the board of directors and serve as an employee of the company, providing transitional support.”

Longhi’s announcement came shortly after the release of a poor earnings report for the first quarter that led to U.S. Steel’s biggest stock price plunge since 1991.

Longhi has been one of the most vocal critics of steel imports in recent years. He attended a Feb. 23 meeting with President Donald Trump and other manufacturing sector CEOs at which Trump told him that U.S. Steel was going to be “heavy into the pipeline business because we approved, as you know, the Keystone Pipeline and Dakota. But they have to buy … steel made in this country.”

In announcing his retirement, Longhi said, “When I came to the company, I envisioned a five-year tenure, which I have completed.”

“I am proud of the progress we have made, which solely resides on the people of this company,” he said. “U.S. Steel employees dug in, tackled every challenge and never stopped looking for ways to improve everything they could control. I am fortunate to have spent five years working with them.”

COO David Burritt was selected to succeed Longhi as CEO.

Commerce Department Announces Affirmative Final Ruling in Rebar Import Cases

The Department of Commerce on May 16 announced affirmative final determinations in the antidumping duty investigations of imports of steel concrete reinforcing bar from Japan and Turkey.

The department also announced an affirmative final determination in the countervailing duty investigation of imports of rebar from Turkey.

The dumping rates were 206.43 to 209.46 percent for Japan and 5.39 to 8.17 percent for Turkey. The subsidy rate for Turkey was 16.21 percent.

The International Trade Commission is scheduled to announce on June 29 its determinations of whether the imports in these cases injured or threatened to materially injure the domestic steel industry.