The Bureau of Labor Statistics reported on Friday that the U.S. economy added 257,000 jobs in the last month, more than expected. Is the U.S. labor market as strong as the January jobs report indicates? How will it affect the Fed’s actions and the gold market?

We have to agree that the January jobs report paints a picture of a strengthening labor market. New jobs were created and wages went up (hourly earnings rose 12 cents an hour over the month). Also, the BLS revised its November and December 2014 estimates, increasing them to 423,000 (up from 353,000) and 329,000 (up from 252,000), respectively. In consequence, spot gold prices fell from $1259.25 to $1241 on Friday, because, due to the strong U.S. labor market, the Fed could hike interest rates sooner rather than later, probably in June.

However, the reality is more complex than just the numbers published by the BLS. First, and more technically, the wage increase in January was due, in large part, to the minimum wage increases of some states.

Second, jobs generally lag GDP growth. This means that the strong employment data may be merely a reflection of the second and third quarters. Therefore, we can see a slowdown in the labor market in the near future, because the U.S. GDP slowed in the Q4. In other words, we believe that problems in the oil industry (oil and gas extraction jobs in January saw the biggest monthly fall in five years) and weak investment spending have not yet been fully reflected in the labor market.

Third, as we pointed out in our previous article, the U.S. labor market is far from full recovery. Indeed, as the report said, the number of long-term unemployed, as well as the number of persons employed part time for economic reasons, was essentially unchanged. In other words, we have seen little recovery in the percentage of people who are looking for work (even accounting for population aging).

To sum up, the labor market is often a lagging indicator. Therefore, the January jobs report simply confirms past economic growth. However, the future is not certain, especially if we realize that other indicators, like investment spending, are not so strong. Thus, the Fed, to which the data is certainly no surprise, may not necessarily be under pressure to raise interest rates. This is because inflation is below the target as well as… the wage growth, which should be around 3.5-4 percent to be consistent with a healthy job market, according to Yellen. The recent U.S. labor market statistics are positive; however, they would be important news if this trend continued for several months. Therefore, the long-term bullish outlook for gold based on the fundamental factors is not changed by the above-analyzed statistics.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

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