Markets are obviously focused right now on the coming FOMC meeting this week, so it is worth analyzing data on the U.S. economy and trying to solve a significant conundrum. Why do statistics show improvement in the labor market, while almost all other U.S. headline data are definitely weak? How does gold behave in a sluggish economy, but with an apparently improving job market?
Yesterday, a few important economic indicators were published. All of them were disappointing and below expectations. First, the National Association of Home Builders/Wells Fargo housing-market index, a gauge of confidence among home builders, declined 2 points to 53 in March, the lowest level since July. It is true that readings above 50 mean that home builders are generally optimistic, but it was a third drop in a row and 53 is below the forecasted 57.
Second, industrial production rose in February by 0.1 percent. It should be generally positive news; however analysts expected more solid growth at 0.3 percent. It may be also revised in the future, as output in January was revised lower significantly, to a decline of 0.3 percent from a prior estimate of a 0.2 percent increase. But the most important piece of data is that the manufacturing output alone dropped 0.2 percent, its third consecutive monthly decline, according to the Fed. The same report says that “capacity utilization for the industrial sector decreased to 78.9 percent in February, a rate that is 1.2 percentage points below its long-run (1972–2014) average.”
Note that mining output, which includes oil and gas drilling, fell 2.5 percent in February. It means that the energy sector is experiencing serious problems and that the industrial production increased solely thanks to a 7.3 percent jump in the output of utilities, as cold temperatures drove up demand for heating.
Third, the Empire State Manufacturing Index, an index based on the monthly survey of manufacturers in New York State and conducted by the Federal Reserve Bank of New York, fell to 6.9 in March from 7.8 in February (analysts expected a reading above 8). What is the most interesting is that the employment sub-index showed a solid gain, while shipments declined and new orders fell into negative territory, which means that companies in the New York Fed District are manufacturing and shipping less, but hiring more. Does it sound logical?
The Empire State Manufacturing Index shows the same nationwide pattern: improving labor data and weak economic activity. Indeed, the Bloomberg ECO U.S. Surprise Index, which measures whether data beats or misses forecasts, declined to the lowest since recessionary 2009.
How can we explain this mystery? Some analysts point out the elevated expectations, but the data seem to be weak, regardless of forecasts. Another explanation, except harsh winter, is that labor statistics are simply flawed. Indeed, the nonfarm payroll survey does not include agricultural workers and the self-employed. It turns out that if we add those categories, the number of jobs actually fell from January to February. This puts into question the robustness of the February nonfarm payroll survey and the following expectations that Fed will hike interest rates sooner rather than later.
Summing up, as we have repeatedly pointed out, the U.S. economy definitely looks worse than it is commonly believed. Yesterday’ data suggest softer economic growth, which may influence the Fed’s decision regarding the timing and magnitude of the interest rate hike, especially that February nonfarm payroll figures do not properly reflect the condition of the U.S. labor market. It is good news for gold investors, since the yellow metal likes very much the combination of the real low interest rates and economic slowdown.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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