AMSCI NEWSLETTER January 2023
January 2023 Market Update
Inflation appears to be easing, but economic expectations for this year remain uncertain.
After reaching a high of 9.1 percent in June 2022, year-over-year inflation declined steadily during the second half of the year and was at 6.5 percent in December. Excluding food and energy, the rate was 5.7 percent.
December’s inflation rate was the lowest since October 2021. It was also the first month since May 2020 that prices declined – by 0.1 percent – on a month- to-month basis.
“Inflation is on its back heels,” one of the more optimistic analysts, the chief economist for Moody’s Analytics, told CNBC. “It’s moderating steadily and, at this point, quickly. … I don’t think people will be talking about inflation this time next year.”
Despite the showdown in inflation, however, the Federal Reserve – which, as a matter of policy, seeks to have price increases stabilize around 2 percent – appears unlikely to completely back off its aggressive campaign of interest rate hikes. In 2022, the Fed raised the target range for the federal funds rate – which began the year at 0 to 0.25 percent – seven times to 4.25 to 4.5 percent. This included four straight 0.75 percent hikes before the central bank eased up a bit and boosted rates by 0.5 percent at its last meeting of the year.
During the Fed’s Dec. 13-14 meeting, according to the minutes, “all participants had raised their assessment of the appropriate path of the federal funds rate relative to their assessment at the time of the September meeting. No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time.”
One reason the Fed is expected to continue raising rates is the strong labor market. The economy added 223,000 jobs in December, pushing the unemployment rate down to 3.5 percent, according to the Bureau of Labor Statistics. The agency noted that, “Notable job gains occurred in leisure and hospitality, health care, construction, and social assistance.”
Fears remain that the Federal Reserve could overdo rate increases and push the economy into a recession.
“We’ll have one because the Fed is trying to create one,” the chief economist at KPMG told CNBC. “When you say growth is going to stall out to zero and the unemployment rate is going to rise … it’s clear the Fed has got a recession in its forecast, but they won’t say it.”
The Federal Reserve’s economic projections predict that the unemployment rate will increase to 4.6 percent this year, while economic growth will reach only 0.5 percent.
Fed Chair Jerome Powell has long talked about engineering a “soft landing” for the economy, but even he acknowledged in December, “I wish there were a completely painless way to restore price stability. There isn’t.”
The manufacturing sector appears to be bracing for a painful year, as the Institute for Supply Management’s Purchasing Managers Index fell for the fourth straight month in December. Other than holding steady from July to August, the index has decreased every month since May. The index is now at its lowest
point since the early weeks of the pandemic in May 2020, and, for the second straight month, it is below 50 (48.4), which is the threshold that indicates economic expansion or contraction.
“Manufacturing contracted again in December after expanding for 29 straight months,” the chair of the institute’s Manufacturing Business Survey Committee said. “Panelists’ companies continue to judiciously manage hiring. The month- over-month performance of supplier deliveries was the best since March 2009. Average lead time remained 32 percent above previous trough for capital expenditures and 37 percent for purchased materials; both are too high. Managing head counts and total supply chain inventories remain primary goals as the sector closes the year. More attention will be paid to demand as we enter the first quarter to shore up order books for the next six to 12 months.”
Only two of 15 industries surveyed reported growth in December: primary metals and petroleum/coal products.
Consumer confidence, however, showed gains in December, with The Conference Board’s Consumer Confidence Index increasing after two months of declines. The index reached its highest point since April 2022, as, according to the board’s senior director of economic indicators, “Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus.”
The Index of Consumer Sentiment from the University of Michigan’s Surveys of Consumers, meanwhile, increased 8.8 percent from December to January, though it was still 3.9 percent below the January 2022 level.
“Uncertainty over … inflation expectations measures remains high, and changes in global factors in the months ahead may generate a reversal in recent improvements,” the surveys’ director cautioned.
Notwithstanding the growth in consumer sentiment, retail spending fell by a seasonally adjusted rate of 1.1 percent from November to December, the sharpest monthly decline of 2022, according to the Census Bureau.
Housing starts were largely unchanged from October to November, though they were 16.4 percent below the total from a year earlier, the Census Bureau and the Department of Housing and Urban Development reported. Existing home sales fell for the tenth straight month in November, down 7.7 percent from October and a staggering 35.4 percent from November 2021, according to the National Association of Realtors.
“In essence, the residential real estate market was frozen in November, resembling the sales activity seen during the COVID-19 economic lockdowns in 2020,” the association’s chief economist said. “The principal factor was the rapid increase in mortgage rates, which hurt housing affordability and reduced incentives for homeowners to list their homes. Plus, available housing inventory remains near historic lows.”
The Dow Jones Industrial Average closed at 34,302.61 on Jan. 13, up 3.5 percent during the first two weeks of the year and up nearly 20 percent since the recent low on Sept. 30. The S&P 500 Index ended Jan. 13 at 3,999.09, recording a year-to-date gain of 4.2 percent.
The dollar, as of Jan. 13, was trading at 0.93 euros, 0.82 pounds, 127.86 yen and 6.7 yuan.
As is not uncommon, the year 2023 has begun with many unanswered questions, among them: Will there be a recession? If there is, how long will it last? Will the Russian invasion of Ukraine continue to disrupt geopolitics and the global economy? How much of an impact will China’s ongoing struggle with Covid-19 have on the rest of the planet? What about its shrinking population and other demographic challenges? With so much uncertainty about such major issues elsewhere in the world – including potentially historic changes within the borders of its two near-peer adversaries – the United States, with its relative stability, could find itself in an increasingly strong position.
Welcome New AMSCI Member - Reibus International
January 2023 Steel Shorts
Japanese Environmental Institute Calls for Reduced Use of Steel
A Japanese environmental research organization released a study in January that concluded, “We need to learn to live with less steel.”
Researchers with the National Institute for Environmental Studies, Japan, analyzed steel usage in that country and projected how it would change “if a strict carbon budget were applied.”
“The research indicates that with a carbon budget of zero emissions, the production of steel goods would be dramatically restricted compared to today, reaching about half the current levels at best,” the organization stated. “In this case, higher-quality steel production (e.g., sheet steel) would be especially hard hit.”
While new technologies may reduce carbon emissions during steel production, the institute’s Dr. Takuma Watari advised that, “We need to confront the possibility that technological innovations might not be ready in time to allow us to maintain current levels of steel production whilst cutting emissions to zero.”
“We do not deny the need to invest in innovative production technologies. Rather, what we want to highlight is that we should look for far more strategic options, instead of simply relying on silver bullet production technologies,” Watari said. “Placing material efficiency and upcycling at the heart of decarbonization plans can reduce the over-reliance on innovative production technologies and prepare for the risk that these technologies may not scale up sufficiently in time.”
Retired GOP Senator Bashes Section 232 Tariffs in Departing Remarks
Pat Toomey, the now-retired Republican senator from Pennsylvania, used some of his final comments on the Senate floor to criticize the Section 232 “Trump- Biden tariffs on imported steel and aluminum.”
Toomey argued that the tariffs – which he said is “just a word that we use sometimes to obfuscate the fact that these tariffs are just taxes on American consumers” – actually “do much more harm than good” because, while they may subsidize the creation of jobs in the steel sector, the higher costs put at risk many more jobs in steel-using industries.
“These millions of Americans who work in the industries that use steel, they outnumber steelworkers by a ratio of, roughly, 80-to-1,” Toomey said.
Toomey also dismissed the national security rationale for the tariffs as a “slap in the face” for consumers and small businesses who must pay higher prices, people who have lost their jobs as a result of the levies, and others who have been negatively affected.
Warning that, “This is all about to get much worse,” Toomey went on to connect the Section 232 national security rationale to the Biden administration’s efforts to use tariffs to promote the production and use of low-carbon steel through an international alliance called the Global Arrangement on Sustainable Steel and Aluminum.
“This abuse of Section 232 will haunt us like a protectionist Frankenstein unless Congress reins in Executive [Branch] abuse of this law,” he said, adding, “If we fail to act, our constituents are going to keep on paying ever-more expensive prices.”
International Trade Administration Releases Global Aluminum Trade Monitor
The International Trade Administration has unveiled the Global Aluminum Trade Monitor, which lists data for the world’s largest aluminum-trading countries.
Using information compiled by a private research firm, the monitor “enables users to customize their analysis and view data in both volume and value.” The data is updated every two weeks.
“The Global Aluminum Trade Monitor provides a critical U.S. industry with the data it needs to make informed decisions,” Assistant Secretary of Commerce for Enforcement and Compliance Lisa Wang said. “The development of this interactive tool builds upon the agency’s current Aluminum Import Monitor by including global aluminum trade flows, not just the trade of products imported into the United States.”
The agency released a similar website forsteel in 2018.
U.K. Steel Industry Near Collapse, Union Warns
A union in the United Kingdom warned in January that the country’s steel industry is “a whisker away from collapse.”
BBC reported that, in a letter to U.K. Business Secretary Grant Shapps, Steve
Turner, assistant general secretary for Unite, said that “crippling energy costs, carbon taxes, lost markets, lower demand, and open market access for imported steel” are putting domestic steel production at risk, and that “direct actions by your government … significantly undermined U.K. plant competitiveness in global markets.”
“With little meaningful action on the part of government in areas of U.K. procurement policy, energy pricing support, green energy generation or support for investment in new plant and technologies, the industry is at a breaking point,” Turner wrote.
BBC noted that a spokesperson for the Department for Business, Energy and Industrial Strategy said that it is “committed to securing a sustainable and competitive future for the U.K. steel sector.”