The last week was weak not only for the U.S. labor market, but also for productivity, manufacturing and construction spending. What does it imply for the gold market?
On Thursday, the ISM manufacturing index fell to 49.4 percent in the August reading from 52.6 percent in July. Readings below 50 indicate a contraction. The index was below that level for the first time since February and it means that difficulties in manufacturing are still present. Moreover, indices for new orders and production also declined into contraction territory. The Markit Manufacturing Purchasing Managers’ Index also fell in August, but only to 52 from 52.9 in July. The weak manufacturing data may diminish chances of the Fed hike in September, but the condition of the labor market seems to be much more important for the FOMC officials.
How may a strong labor market accompany a contraction in manufacturing? One of the possible answers to this puzzle is the languishing U.S. productivity, which fell 0.6 percent in the second quarter. It was the steepest decline since 2013 and it was down for the third consecutive quarter. As a result, unit labor costs jumped 4.3 percent in the Q2. When it takes an increasing amount of hours to produce less output you know that something is not good with the economy. In the long-term, economic growth depends on productivity. Hence, weak data is good news for the gold market in such a horizon.
Last but not least, spending on construction was flat in July, as the gains in private construction were offset by weakness in government projects. However, a decline in June was revised to show gains.
To sum up, on top of disappointing payrolls data, the manufacturing sector still faces significant difficulties, while productivity declined for a third quarter in a row. These pieces of news should be positive for the gold market. Indeed, the price of gold rebounded as manufacturing (and productivity) data cooled odds of the Fed interest rate hike in the near future.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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