May 2022 Market Update
By at least one measure, the United States is halfway to a recession.
From January to March, the economy recorded its first quarterly contraction since the beginning of the pandemic, as gross domestic product (GDP) decreased by 1.4 percent, the Bureau of Economic Analysis reported. The traditional definition of a recession is two consecutive quarters of negative growth.
The contraction marked a sharp swing from the fourth quarter of 2021, when the economy expanded by 6.9 percent.
The bureau attributed the shrinkage, in part, to the Covid surge that started the year.
“In the first quarter, an increase in COVID-19 cases related to the Omicron variant resulted in continued restrictions and disruptions in the operations of establishments in some parts of the country,” the bureau stated. “Government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased as provisions of several federal programs expired or tapered off.”
Some analysts are cautioning against overreaction, noting, in addition to the transitory impact of Omicron, that more than half of the decline – 0.8 percent – resulted from a slowdown in inventory investments, which were very high late last year amid worries about potential shortages during the holiday season. A 20 percent increase in imports – which are deductions from GDP – was another factor that might be unique to that time period.
“The report isn’t as worrisome as it looks,” CNN quoted Lydia Boussour, lead U.S. economist at Oxford Economics, as saying. “The details point to an economy with solid underlying strength that demonstrated resilience in the face of Omicron, lingering supply constraints and high inflation.”
One of those underlying strengths is the labor market. The economy created 428,000 jobs in April, and the unemployment rate stands at 3.6 percent, just a tenth of a point above its pre-Covid level, the Bureau of Labor Statistics reported. (The labor force participation rate has never fully recovered from the pandemic and remains about 1.2 percentage points below February 2020.)
With demand for labor so high, many businesses are reporting difficulties in filling positions. In response, they are increasing wages, which, when combined with the lingering effects of the pandemic, Russia’s invasion of Ukraine, and ongoing supply chain holdups, is contributing to an inflation rate that is near a 40-year high. Prices in April were 8.3 percent higher than they were a year earlier, down slightly from the 8.5 percent year-over-year increase in March.
The Federal Reserve, noting that, “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” in early May eschewed its standard quarter-point hike in favor of a 0.5-point boost to the target range for the federal funds rate, which is now at 0.75 to 1 percent.
This was the first half-point increase since 2020. It was also the second interest rate hike of 2022, and the central bank has indicated that as many as five more can be expected this year. The challenge for the Fed is adopting a monetary policy that is aggressive enough to rein in inflation, but not so aggressive that it shocks the economy into a recession.
“I think we have a good chance to restore price stability without a recession, without a severe downturn, and without materially higher unemployment,” Federal Reserve Chair Jerome Powell said in early May.
Many are not so confident, however. A CNBC survey of economists and others in financial fields found that only 33 percent anticipate a “soft landing,” while 57 percent expect rising rates to push the economy into a recession.
And Goldman Sachs Senior Chairman Lloyd Blankfein said in May that he sees a “very, very high risk” of recession and that only a “narrow path” exists to avoid it.
“If I were running a big company, I would be very prepared for it,” he said on CBS’s Face the Nation. “If I was a consumer, I’d be prepared for it.”
Consumers and companies are, indeed, expressing some doubts about the economy, whether because of inflation or a possible recession. The Index of Consumer Sentiment from the University of Michigan’s Surveys of Consumers plunged nearly 10 percent from April to May and is down more than 28 percent from its May 2021 level.
“Consumers’ assessment of their current financial situation relative to a year ago is at its lowest reading since 2013, with 36 percent of consumers attributing their negative assessment to inflation,” the surveys’ director said.
The Conference Board’s Consumer Confidence Index similarly, but not so dramatically, dipped from March to April and remains well below mid-2021 readings, which approached pre-pandemic highs.
“Purchasing intentions are down overall from recent levels as interest rates have begun rising,” the board’s senior director of economic indicators said. “Meanwhile, concerns about inflation retreated from an all-time high in March but remained elevated. Looking ahead, inflation and the war in Ukraine will continue to pose downside risks to confidence and may further curb consumer spending this year.”
On the business side, the Institute for Supply Management’s Purchasing Managers Index has fallen five of the past six months and is now back where it was in mid-2020, the difference being it was trending upward two years ago.
“In April, progress slowed in solving labor shortage problems at all tiers of the supply chain. Panelists reported higher rates of quits compared to previous months, with fewer panelists reporting improvement in meeting head-count targets. April saw a slight easing of prices expansion, but instability in global energy markets continues.”
Housing starts were largely unchanged from February to March, according to the Census Bureau and the Department of Housing and Urban Development, while existing home sales decreased by 2.7 percent, the National Association of Realtors reported.
“The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power,” the association’s chief economist said.
The Dow Jones Industrial Average ended April at 32,977.21, down 9.3 percent for the year. The S&P 500 Index closed the month at 4,131.93, recording a year-to-date loss of 13.3 percent.
Amid all the uncertainties and negative indicators, the dollar has remained strong, and, in fact, has gained value recently. On April 30, it was trading at 0.95 euros, 0.8 pounds, 128.8 yen and 6.6 yuan.
At this point, it seems more likely than not that growth will return in the second quarter and an “official” recession will be avoided. At least for now. Economic challenges will, obviously, remain, chief among them inflation. Gauges of price increases will probably moderate during the next several months, but this could be only because they will be measured against higher baselines. (Costs were increasing in mid-2021 – a time when the Federal Reserve was dismissing inflation as “transitory.”) Then there is China, whose continued insistence upon zero-Covid policies are exacerbating economic and supply chain difficulties around the world, and Russia, whose invasion of Ukraine is not only driving up energy prices but even threatening world wheat supplies. Two years ago, there was debate over whether the economic recovery in the United States would be U-shaped, V-shaped, or W-shaped. Whatever letter it has actually come to resemble cannot be found in English.
May 2022 Steel Shorts
Commerce Secretary Says Domestic Steel Production Can’t Be Allowed to ‘Wither’
Secretary of Commerce Gina Raimondo in May once again defended the Section 232 tariffs on steel and aluminum that were originally imposed by the Trump administration in 2018.
“The reason why these [tariffs] were created is because countries, particularly China, have flooded the United States with cheap steel at depressed prices which is bad for [American] workers,” Raimondo said at a conference, according to Morningstar. “You can’t have a strong economy if you allow your steel industry to wither.”
With inflation at a 40-year high, though, Raimondo did allow for the possibility of tariffs on some products being eased.
“We are undergoing a review to see whether it makes sense to provide some tariff relief or exclusion” for some items, she said.
U.S. Suspends Steel Tariffs on Ukraine for 1 Year
Tariffs on steel imports from Ukraine will be suspended for one year, the Commerce Department announced on May 9.
Steel from Ukraine and most other countries has been subject to a 25 percent tariff since 2018 as the result of action taken by the Trump administration – and continued by the Biden administration – under Section 232.
The suspension is intended to help Ukraine as it battles the Russian invasion.
“We can’t just admire the fortitude and spirit of the Ukrainian people, we need to have their backs and support one of the most important industries to Ukraine’s economic well-being,” Commerce Secretary Gina Raimondo said. “For steel mills to continue as an economic lifeline for the people of Ukraine, they must be able to export their steel.”
The agency noted that 1 in 13 Ukrainians is employed in the steel industry and “Many of Ukraine’s steel mills have continued to pay, feed, and even shelter their employees over the course of fighting. Despite nearby fighting, some Ukrainian mills have even started producing again.”
The move follows an announcement by the European Union that it will suspend tariffs on all imports from Ukraine – steel and otherwise – for one year.
War in Ukraine Disrupts Supplies of Metals to Europe
Russia’s invasion of Ukraine has significantly disrupted Europe’s supply of steel and other metals, Financial Times reported.
Before the war, Ukraine and Russia provided a combined 20 percent of the European Union’s finished steel products. Now the flow of Russian goods has been stopped by sanctions and Ukraine’s production capacity has been reduced. In addition, the outlet noted, “there are big logistical challenges, from the disruption to ports to the Russian missile attacks on the country’s railway network.”
“A situation of almost panic was created” by the invasion, the chief executive of Marcegaglia, an Italian steel processor, said. “Many raw materials became difficult to find.”
Prices initially spiked, but they have eased since then, as other suppliers have been identified, Ukraine has been able to maintain some production, and projected steel consumption has decreased because of inflation.
European Commission Reviewing Steel Import Safeguards
The European Commission is expected to announce changes to its steel import safeguards soon.
The commission put tariff-rate quotas on steel in 2018 amid concerns that the Section 232 tariffs implemented by the United States would lead countries to try to sell more steel in Europe.
Many European businesses argue that the safeguards have driven up steel prices and want them to be lifted, especially now that Russian steel imports have been banned and an agreement became effective this year that enhances the steel trade between the European Union and the United States.
A European Commission spokesperson, according to S&P Global, said on May 11 that, “The review [of the safeguards] is still ongoing and should be concluded and adopted in time for any changes to apply as of 1 July 2022. The Commission expects to issue a [World Trade Organization] notification with the main elements of the proposal towards the end of May or early June at the latest.”
CUSTOMS CORNER
CBP Provides Additional Information on Section 232 TRQ Procedures
U. S. Customs and Border Protection (CBP) has provided additional information on the Tariff Rate Quota (TRQ) procedures applicable to the Section 232 remedies on steel and aluminum. This information comes from Michael Dean, Assistant Director of the Base Metals Center at CBP direct to AMSCI; from Drew Vielhaber, Management and Program Analyst at CBP HQ’s Quota Branch, in a March 30 webinar hosted by the National Customs Brokers and Freight Forwarders Association (NCBFFA); and from the Quota Book announcement by CBP providing details about the TRQ arrangement for Japan at https://www.cbp.gov/trade/quota/bulletins/qb-22-622-2022-tariff-rate-quota-trq-steel-articles-japan. Also see the Presidential Proclamation formally implementing the Japan Agreement at https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/31/a-proclamation-on-adjusting-imports-of-steel-into-the-united-states-2/.
Presentation: All TRQ entries must be filed as a quota type consumption, warehouse or FTZ entry. Non-quota goods may be included on the same entry. Quota filings are first-come, first served. To be valid, there must be an error free Entry Summary on file in ACE; payment of any duties and fees must have been submitted, or scheduled in ACE; and arrival information for the vessel must have been transmitted to ACE. The “presentation date” for a quota entry is the date/time on which the last of the all the requirements has been met. Any rejected filing must be refiled, establishing a new presentation time/date. If any correction is required on a quota entry, even if not for quota goods, check with the HQ Quota Branch first to avoid having the quota reservation lost, or the quota amounts double counted.
All quota entries are held for batch processing at the end (8pm Eastern) of the work day, each weekday. Entries receive priority based on the time of presentation. Filers may receive a Pending notice, meaning that the entry has been filed and is waiting for processing, followed by “Quota Accepted” or “Quota Filled’ notice, depending on status, after processing. If one or more quota categories is only partially available, the filer will receive an “Apportioned” notice. Apportionment: Quota categories may be filled either at the opening moment, if enough eligible entries have been filed before that time, or at a later time during each quota period. If filled at the opening moment, all accepted entries will receive a pro-rata share of the available quota. If filled at a later time, only the entry in queue will be apportioned. Amounts in excess of the available quota may be imported with Section 232 duties due, exported, destroyed, or placed in bonded warehouse or an FTZ.
Care must be taken in refiling entries which have been apportioned. Do not cancel the entry, or the quota will go to the next entry in line! Refile as apportioned, following the rules for pro-ration by line item. There could be multiple quota lines, only one or some of which are apportioned. The refiled entry must use the apportioned amounts, and use the same line items as the originally filed entry. Any new line items – such as for the above quota amounts – must be added after all of the original lines – a software override may be necessary. Later modifications can be made – for example to adjust to container load amounts – but care is needed, and HQ Quota should be consulted regarding any problems or concerns. If refiling is not done correctly the quota reservation could be lost.Exclusions: Exclusions are treated somewhat differently for EU steel quotas and for steel entries from Japan and (most likely) the UK. EU exclusions – both those specifically granted to an importer, and those available as General Approved Exclusions (GAEs) – do not count against the EU steel quotas. Exclusions do count against the steel quotas for Japan (and probably) the UK.
EU Aluminum exclusions also count against quota limits. (There is no aluminum TRQ for Japan.) While they can be used in the first quota period to secure entries in excess of the first period quota amount, such entries may also use up the annual quota amount – reducing the amount available in the second quota period.
Goods covered by either individual exclusions or GAEs may be presented at any time during the quota year, and will be accepted for entry. This applies even if the quota has been fully utilized for the period or annual limits. For Japan, the exclusion amounts “use up” quota allocations, but are not restricted to either the quarterly or annual amounts. So-called “exclusion overflow quota” will be tracked by CBP; it is unclear whether it could have an effect on future allocations.
FTZ: Goods entered into a Foreign Trade Zone (FTZ) in “preferred” status prior to January 1, 2022 (EU) or April 1, 2022 (Japan) can secure TRQ status if there is an amount available at the time of presentation of a quota type FTZ entry. It is expected that goods entered into an FTZ after those dates will be able to claim quota status if available, but CBP is still working on the proper procedures. There was a glitch at the beginning of 2022 for the EU quota where ACE improperly assumed the TRQ had been in place since June 2018, but that appears to have been corrected. Certificate of Analysis: The EU (and the upcoming UK) aluminum TRQs require the presentation of a Certificate of Analysis in order to qualify for the TRQ. This requirement, although in effect, had not yet been incorporated in ACE as of the end of March, 2022.
Steven W. Baker
AMSCI Customs Committee Chair
swbaker@swbakerlaw.com