The New York Times - USA (2020-06-25)

THE NEW YORK TIMES BUSINESSTHURSDAY, JUNE 25, 2020 N B5

INVESTING | VIRUS FALLOUT

ENERGY

Spread of Virus Expected

To Dampen Gas Demand Demand for gasoline is a proxy for economic activity, and the recent surge in coronavirus cases in states like Arizona, Florida and Texas could stem a rise in gas prices. In Texas, the second-most populous state after California, prices could fall sharply after Gov. Greg Abbott on Tuesday urged people to stay at home to reduce the spread of the virus. Demand for gasoline has recov- ered more than half of the drop it suffered when the coronavirus spread widely in April and many states and cities ordered people to stay at home and businesses to shut down, IHS Markit, a consulting and research firm said on Wednesday. A survey of 15,000 gasoline stations by IHS taken before the new rise in cases found that use of gasoline was down about 22 percent in the second week of June compared with the same week a year ago. That’s a stark improve- ment over the second week of April, when gas purchases were down nearly 50 percent. So far this year, gasoline sales have fallen the most in the North- east, where the pandemic spread widely in March and April, caus- ing tens of thousands of deaths. Demand is down by about a third in Massachusetts. By comparison, sales are down about 26 percent in California. The average price for regular gasoline nationwide on Wednes- day was $2.16 a gallon, down from $2.66 a year earlier, according to AAA. Prices at the pump have been rising in recent weeks. Oil prices remain roughly a third below at the start of the year.

COMMODITIES

Price of Gold Surges

As Investors Seek Haven

Gold prices are within spitting distance of record highs, after a surge of buying pushed the pre- cious metal up 17 percent this year. Early on Wednesday, futures prices hovered around $1,780 an ounce, up more than 1.5 percent this month. Gold is now a bit more than 5 percent away from reach- ing the record levels of nearly $1,900 an ounce it touched in August 2011. Gold traditionally is viewed as a hedge against potential inflation, and a safe asset for investors to have in their portfolios during times of growing political and economic uncertainty. With multiple crises, including the biggest surge in unemploy- ment since the Great Depression, hammering the United States economy ahead of highly con- tentious presidential election in November, demand for the metal has picked up. Some in the markets also view the rapid expansion of the money supply by the Federal Reserve as a reason to expect future inflation to be higher, making gold an attractive investment.

TRAVEL

India Airlines Criticized

For ‘Repatriation’ Flights

India is coming under increased pressure to open its airspace to international carriers after the United States and some European nations accused it of discrimina- tory practices under the garb of “repatriations” flights. The U.S. Department of Trans- portation said on Monday that the Indian charter flights — orga- nized by the government to bring Indian nationals home amid global travel restrictions — go beyond “true repatriations.” It accused India’s national carrier, Air India, of selling tickets in the open market, even while New Delhi officials keep U.S. airlines from flying to India. Future chartered flights, American officials said, would require Washington’s approval. The Indian government sus- pended international air travel operations on March 22 after imposing a nationwide lockdown to curb the spread of the coronavirus. On many occasions, it failed to greenlight chartered flights operated by American carriers. India’s ministry of civil aviation said in a tweet on Tuesday that it was considering easing those restrictions to allow flights from American, French, British and German carriers.

Virus Briefing

The Labor Department is seeking
a new federal regulation that
could discourage retirement
funds from making investments
based on environmental, social
and governance considerations.
The department said in a news
release Tuesday evening that it
was taking the action to “provide
clear regulatory guideposts.” La-
bor Secretary Eugene Scalia, in an
opinion article Wednesday in The
Wall Street Journal, said the move
“reminds plan providers that it is
unlawful to sacrifice returns, or
accept additional risk, through in-
vestments intended to promote a
social or political end.”
Investments based on social
goals can consider, for example, a
company’s efforts to reduce its
carbon footprint or to promote ra-
cial and gender diversity among
its directors and executives.
Such investments have grown
immensely in recent years, to
roughly one of every four dollars
under management, according to
the US SIF Foundation, a nonprof-
it focused on the category. While
little of that was in workplace re-
tirement plans, some experts
think 401(k) plans will play an in-
creasing role in such investing.
But experts said the proposed
rule would not meaningfully
change employers’ obligations.
And Morningstar has found that
funds based on environmental, so-
cial and governance goals —
known as E.S.G. factors — outper-
formed conventional offerings
during the first quarter of this
year and going back several years

as well. Under the Employee Retire- ment Income Security Act of 1974, known as ERISA, administrators overseeing employee retirement plans — usually an employer’s financial or human resources officials — are required to act in the strict financial interests of workers. That typically means they can add a mutual fund option that em- phasizes social and environmental goals only if they expect it to perform at least as well as an option that does not focus on those factors while taking similar risk. “The Department of Labor has always taken the position that plans can take into account other factors, such as social and environmental, as long as they don’t increase risk or sacrifice return for the plan,” said Olena Lacy, who served as assistant labor secretary in charge of the agency overseeing employee benefits during the Clinton administration. Ms. Lacy said Democratic and Republican administrations had simply differed over the years in framing the obligations of employee plan administrators. “Democrats say the standard is that it’s OK for you do to this as long as it comes out the same,” she said, referring to risk and returns. “Republicans say it’s illegal for you to do this unless it comes out the same.” Jon Hale, the head of sustainability research at Morningstar, said the practical effect of the new framing could be to deter plan administrators from adding E.S.G. options to 401(k) plans for fear of violating the law.

Even if the proposal does not come to pass, he said, employers might decide to avoid E.S.G. investments because they see them as a potential political minefield. The proposed rule says that environmental, social and governance concerns can be taken into account independent of factors like risk and return only if they act as a kind of tiebreaker when investments are otherwise finan-

cially indistinguishable. In that case, the rule would require plan administrators to document the investment analysis that led to the conclusion. The department acknowledged that the provision might create additional burdens for employers, but said in a background document that it “does not expect this requirement to impose a signifi- cant cost as these situations are rare.”

In the Labor Department release, Mr. Scalia said the proposed rule was meant to ensure that social goals would not come at the expense of returns to participants in retirement plans, and the release says employers cannot invest in E.S.G.-focused funds that seek to “subordinate return or increase risk for the purpose of non- financial objectives.” The department did not re- spond to a request seeking exam- ples of employers that have pursued such strategies. Jerome Schlichter, a lawyer who has successfully pursued nu- merous employers on behalf of workers over excessive fees in their 401(k) plans, said he was not aware of employers who had sought to pursue E.S.G. goals at the expense of financial returns. “That has not been something that we’ve seen,” Mr. Schlichter said. “It hasn’t been done by fidu- ciaries in any broad way, in part due to concerns about exposure for litigation.” Other lawyers said that while the growth in E.S.G. investment options and their rising popularity among workers could require ad-

ditional regulation and enforce- ment, such action would typically be better aimed at investment companies marketing such funds, rather than employers and their plan administrators. George Sepsakos, a lawyer who advises employer plans about their legal responsibilities, said the Securities and Exchange Commission had been reviewing disclosure from E.S.G. funds to make sure their marketing accu- rately reflected their investing strategies. “Right now the defini- tion can mean different things to different people,” Mr. Sepsakos said. He said that if an investment company had misrepresented potential returns or fees from an E.S.G.-focused fund, the investment company rather than the employer would typically be lia- ble. “The plan fiduciary can only make investment decisions based on what they know or should have known at the time,” he said. A 2015 academic paper examin- ing decades of research and over 2,000 other studies found that about 90 percent of the work showed no negative connection between E.S.G. principles and corporate financial performance. A large majority showed positive findings. As a result, said Mr. Hale of Morningstar, the proposed rule could end up being counterpro- ductive. “Not only could investments that focus on the long-term sustainability of companies lead to truly long-term outperfor- mance because you’re picking better quality companies,” he said. “But there is also the sys- tems argument, that you’re help- ing to create a financial system and economy that will be more successful.”

Labor Secretary Eugene Scalia warned against retirement plans that “promote a social or political end” at the expense of risk or yield.

POOL PHOTO BY LEAH MILLIS/EPA, VIA SHUTTERSTOCK

Labor Dept. Seeks

Social Goal Limits

In Retirement Plans

By NOAM SCHEIBER and RON LIEBER

A proposed rule that

might inhibit

investment options.

would probably help the economy.
It is the nation’s largest manufac-
turing sector and employs
roughly 1.5 million people in man-
ufacturing, sales and service.
That said, auto sales will be
down sharply this year, more than
in any year since at least 2009; Al-
ixPartners, a consulting firm, ex-
pects sales of new vehicles to fall
about 19 percent this year, to 13.7
million. Experts worry that a
surge in coronavirus cases in
places like Arizona, Florida and
Texas could drop sales further as
more people stay home to avoid
getting sick or making others ill.
In addition, more than 20 mil-
lion Americans were out of work
in May, according to the Labor De-
partment, and unlikely to be in the
market for new cars. Rental car
companies, which have been hit
hard by the drop in travel and typi-
cally account for up to 20 percent
of the new car market, have all but
stopped buying vehicles. Hertz,
which operates a fleet of more
than 500,000 cars in the United
States, filed for bankruptcy pro-
tection last month.
“Will we see rental orders come
back in the fall?” asked Charles
Chesbrough, a senior economist
at Cox Automotive. “We don’t
know yet, but is seems like most
business travel is going to be on
hold at least until the end of the
year.”
Yet automakers and car dealers
say they are feeling optimistic be-
cause sales of new cars to individ-
uals and families, the industry’s
main customer base, have re-
bounded strongly.

“There’s pent-up demand,” said
Doug Waikem, owner of six new-
car franchises in Massillon, Ohio.
“There are people who were
ready to buy, and then the virus
hit. They put it on hold, but some
are starting to come back.”
Auto manufacturers have lured
buyers back to dealerships with
generous financial incentives. For
a time, several companies, includ-
ing General Motors, Ford Motor
and Fiat Chrysler, were offering
zero-interest loans for 84 months
on most or all of their vehicles.
Most automakers have phased
out those offers, but interest-free
loans for up to 72 months are still
available on many models.
Many consumers appear to be
buying cars with the help of some
of the $1,200 federal stimulus pay-
ments and money they saved
when they cut other spending in
March, April and May, said Pete
DeLongchamps, senior vice presi-
dent of manufacturer relations at
Group 1 Automotive, a large deal-
ership group based in Houston.
“It’s certainly not as bad as we
feared right now,” he said. “The

government put a lot of money into the market, and now people are spending money on cars.” Sales have rebounded so fast that automakers are working to ramp up production to restock dealerships. Inventories dwin- dled over the last few months because so few cars were produced. The industry made just 4,840 vehicles in North America in April, according to Automotive News. Out- put jumped in May, but the month’s total, 371,551 cars and light trucks, was still far below the 1.5 million produced in the same month in 2019. The supply of pickup trucks and S.U.V.s, which American drivers

prefer to sedans these days, has been particularly tight. G.M. has an especially short supply of Chevrolet and GMC trucks, dealers said, because its production was halted by a 40-day strike by the United Auto Workers union last fall. High-quality used cars are also scarce. “Our used sales have ex- ploded,” Mr. Waikem said. “A $10,000 to $14,000 used car is gold.” Robert Watkins, a production supervisor at a manufacturing company in New Hampshire, is among those buying a used car. Because of the virus, he and his wife had to cancel a trip to Ger-

many this summer, freeing up some cash. “So I thought, I should probably get a better car,” Mr. Watkins said. Last week, he traded in his beat- up Hyundai Accent with 163,000 miles for a 2017 Volkswagen Golf SportWagen with almost every option imaginable. To reopen their factories, automakers developed new pro- cedures to screen workers for coronavirus symptoms and reduce interactions between employees. These included allowing time for cleaning work places, staggering arrival times, adding transparent barriers to assembly lines and in- stalling no-touch faucets and

doors. So far, production appears to be ramping up with few major dis- ruptions. Ford said it now expected to have all its U.S. plants back on normal shift schedules this Monday, two weeks sooner than expected. G.M. has returned all of its truck and S.U.V. plants to three shifts a day, and most of its other plants are on the schedules they were on before the pandemic took hold. Ninety percent of the company’s hourly workers are back to work, the company said. G.M., Ford and Fiat Chrysler have most of their assembly plants in the Midwest, where coronavirus cases have been falling or are flat. But even foreign automakers, which have most of their plants in the South where cases are rising, said factories were more or less back to normal. Honda, which makes cars in Alabama, Indiana, Ohio, North Carolina and South Carolina, said it had planned to halt production for three days at the end of June as part of the July Fourth holiday but would now keep its plants run- ning. “Honda has seen a steady climb in customer traffic at our dealerships over the last month,” the company said in a statement. “We saw a strong sales recovery in May, and we expect this to last into the summer sales season.”

Automakers, Pulling Out of a Skid, Ramp Up Production

Fiat Chrysler factories in Windsor, Ontario, above, and Warren, Mich. Most G.M., Ford and Fiat Chrysler plants are in the Midwest, where virus cases have been falling.

FCA, VIA REUTERS

PAUL SANCYA/ASSOCIATED PRESS

FROM FIRST BUSINESS PAGE

19%

The expected decrease in new car
sales this year, to 13.7 million.

The New York Times - USA (2020-06-25)

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