U.S. personal spending rose 0.3 percent in July. What does it mean for the U.S. economy and the gold market?
American consumers spent a bit more in July than in the previous month, mostly on durable goods. Personal expenditures increased 0.3 percent on a monthly basis, slightly less than expected (economists forecasted 0.4 percent). The rise was driven again by vehicle sales. Thus, the report was interpreted by financial press as very favorable beginning of the third quarter. We do not know why, because personal expenditures are rather weak from the long-term perspective, as you can see in the chart below. And the Atlanta Fed GDPNow model’s forecast for real GDP growth in the third quarter decreased by 0.2 percentage points following the personal income and outlays report from the U.S. Bureau of Economic Analysis.
Chart 1: Personal consumption expenditures from 2005 to 2015 (as percent change from year ago).
However, personal income increased 0.4 percent, with a rise in wages and salaries by 0.5 percent, the largest jump since November 2014. Wage growth may be especially warmly welcomed by the Fed.
On the other hand, inflation remained subdued. The PCE index rose 0.1 percent on a monthly basis (down from 0.2 percent growth in the last month) and 0.3 percent over the 12 months. The core PCE index increased 0.1 percent month-over-month and 1.3 percent on an annual basis. Although Stanley Fischer does not seem to care about stubbornly low inflation (he considers it a temporary phenomenon), other Fed officials believe that it will take some time for inflation to return to the 2 percent target. For example, the Minneapolis Fed President Narayana Kocherlakota (without a right to vote) said recently that even more easing should be considered, while New York Fed President William Dudley (voting FOMC member) said the prospect of a September rate hike seems less compelling after the recent market turmoil. And investors should remember that inflation reports next month will reflect the August decline in oil and fuel prices.
The take-home message is that the consumer spending rose in June, as well as personal income and wages. On the other hand, inflation remained benign; however, the Fed could consider it a transitory factor and hike anyway. It seems that the nearest payroll report will be really decisive for the Fed’s decision on an interest rate hike and for the gold market. A number better than the expected 223,000 gains could push gold downward, while disappointing data could postpone the Fed hike and support the price of gold.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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