INSIGHTS: “COMPETITIVE EASING” HURTING U.S. RECYCLERS AND MANUFACTURERS
The size and scope of monetary stimulus measures by central banks in the major developed economies since the end of the Great Recession have been truly unprecedented. Whether quantitative easing and other stimulus programs have had their desired effect – staving off deflation while promoting investment and growth – is certainly still open for debate. There can be little doubt, however, that the flood of liquidity produced by monetary stimulus programs in Japan, the Euro zone, the United States and elsewhere has dramatically impacted foreign exchange rates and with it the U.S. trade balance, commodity prices, and the ability of our manufacturers to compete overseas. While the Federal Reserve’s decision to hold off raising the target federal funds rate at the September FOMC meeting put a temporary brake on dollar appreciation, subsequent statements by Fed Chair Janet Yellen and ECB President Mario Draghi’s recent dovish statements indicate those central banks are likely headed in opposite directions. With central bankers in Japan also contemplating additional “competitive easing,” the potential for further dollar appreciation remains significant, presenting multi-pronged risks to the nation’s global competitiveness in general and scrap recycling industry in particular.
As outlined in John Dunham and Associates Economic Impact Study on the U.S.-Based Scrap Recycling Industry (2015), the U.S. scrap recycling industry is a major industry that directly and indirectly supports more than 470,000 jobs with an annual economic impact of nearly $106 billion. Thanks in large part to the rapid economic expansion in China and accompanying rise in commodity prices, the scrap industry has become increasingly global in nature over the last two decades. According to trade data from the Census Bureau, U.S. exports of all scrap commodities rose from less than $4 billion in 1998 to nearly $33 billion in 2011. But greater reliance on overseas sales as a source of revenue growth also comes at a cost as developing economies have slowed and other developed economies have devalued their currencies through monetary policy operations.
While the Federal Reserve ended its quantitative easing program in October 2014, stimulus measures overseas – including the Bank of Japan’s annual target asset purchases worth 80 trillion Japanese yen and the European Central Bank’s 1.1 trillion Euro stimulus program, continue to weigh on foreign currencies. As compared to 2012 when the dollar was buying less than 80 Japanese yen, the dollar has been trading up around 120-125 yen for most of this year. Similarly, the dollar was briefly trading near $1.05 against the Euro in the first quarter of 2015, versus an exchange rate that approached $1.40 as recently as May 2014. The appreciation of the dollar not only makes our dollar-denominated scrap exports less competitive as compared to other scrap exporting countries, it also makes imports of both scrap and other raw materials more attractively priced. According to the American Iron and Steel Institute, finished steel imports into the United States now represent 31 percent of the domestic market. As imports of steel and other products capture a larger share of the domestic market – crowding out demand for domestically produced goods – local demand for scrap as a raw material input declines. The supply of scrap is also affected as the manufacturing process also generates a significant portion of our nation’s scrap supply.
The strength of the dollar impacts the scrap recycling industry via other channels as well, perhaps most critically by weighing on dollar-denominated commodity prices. All other things being equal, prices for everything from copper to steel to crude oil tend to move inversely to the dollar. As compared to 2011 when the price of copper averaged $4 per pound, copper prices have recently dropped as low as $2.25 per pound. Although the slowdown in China, global commodity market fundamentals and investor flight from commodities have all played a part in the commodities sell-off, so too has dollar appreciation. As primary commodity prices decline, scrap becomes a relatively less attractive raw material choice. But just as importantly, the incentive to collect and deliver recycled commodities is closely correlated with commodity prices. As a result, when the dollar strengthens and dollar-denominated commodity prices come under pressure, the incentives for recycling decline. Deteriorating domestic manufacturing conditions, falling commodity prices, reduced incentives for recycling, tighter scrap supply and demand, and weaker scrap export sales are some of the ways the vital scrap recycling industry is susceptible to the “competitive easing” we face today. While the Fed’s widely expected rate hike before the end of 2015 could result in additional dollar strength, raising rates would also send the message the Fed is confident the U.S. economic recovery has become self-sustaining, a message other central bankers around the world would do well to emulate.
ON THE ECONOMY: THE OUTSIDERS
I’m taking over the “On The Economy” column this month as John Dunham is buried under a heap of data and economic models. This has turned out to be an extraordinarily busy few months for the firm, which we attribute to our government relations clients’ need to prepare for the inevitable changes that come with an election year.
Before delving deeper into the election year and what it means for government relations professionals, I’d be remiss without including some song lyrics, in keeping with the Dunham tradition, to capture the current mood of the presidential election …
They’re the in crowd, we’re the other ones It’s a different kind of cloth that we’re cut from We let our colors show, where the numbers ain’t We’re the paint where there ain’t supposed to be paint That’s who we are That’s how we roll The Outsiders, The Outsiders.
This rebellious rock/rap song written and sung by country musician Eric Church describes well the current cast of characters running for President. On the one hand you have career politicians, who have risen through the insider ranks and believe they’ve earned their stripes to be President of the United States. And then there are the outsiders, the Donald, Carly and Ben, fueled by an angry electorate, who have managed to grab 54% of the vote in the latest Quinnipiac National Poll. There’s plenty of drama, from Trump’s off the cuff remarks to Hillary’s email troubles, and it’s anyone’s guess how all of this will unfold in the coming months.
Despite the uncertainty that an election year brings, particularly this one, there are two things that never go out of style in government relations – research and data.
It’s an opportune time to meet with your lobbying team to assess the current political environment and prepare a forecast of potential election outcomes and the hot button issues that will drive voters to the polls and impact the legislative process. Results from such a forecast raise two important questions: Who are the allies needed to support your organization’s policy initiatives and do you have the right lobbying team in place to get the job done? Ally identification and outreach should begin well in advance of any legislative battle. As for your lobbying team, it’s wise to keep the bench warm with new or additional team members in the event the legislatures change party control.
And then there is the need for developing substantive materials to communicate and advance a legislative agenda. Many of our clients are updating their economic impact studies because they understand the importance of having current facts and figures at their fingertips. Equally important is being flexible and sensitive to the political shifts that occur in an election cycle. These shifts, big or small, may require presenting data in different ways.
Political shifts result in new leaders and elected officials. As a government relations professional, much of your time will be spent educating freshman decision makers and their staff about your company or industry. It’s important to have data that demonstrate your organization’s economic footprint in the U.S., a state, and more importantly, in a legislative district. And the data must be presented in a way that connects with your audience.
The good news is that election years provide an abundance of research and data. Pollsters and campaign operatives are in the field continually gauging the public’s mood on the economy and a wide range of other issues that will shape future political priorities. These insights, often appearing in newspaper headlines and debated by the talking heads, are invaluable and should be incorporated into messaging for elected officials and key influencers. By presenting ideas in a way that aligns with the public, your story will resonate with both insiders and outsiders.
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