The Chicago PMI plunged in May to a reading of 46.2 from 52.3 in April. What does it say about the state of the U.S. economy and how can it affect the gold market?
The Chicago Business Barometer fell sharply back into contraction in May, after April’s gain. Although the drop was led by a decline in new orders (by 13.8 percent to 47.5 from 55.1 in April), all five components weakened and now all of them are below the 50 breakeven mark. The current reading suggests that the first quarter slowdown was not transitory (as April’s positive move could have implied), but reflects a more fundamental slowdown. Indeed, the three month average at 48.3 is significantly down from 61.3 in the fourth quarter of 2014. In other words, the May data indicates that sluggish activity has carried through to the second quarter.
The Chicago Business Barometer is considered to be a leading indicator of the U.S. economy. It is the last of the regional indicators before the Institute for Supply Management's national gauge, which is due for release today. The weak May data undermines faith in a significant rebound in the second quarter. Especially that Q1 GDP read was revised from a 0.2 percent gain to a 0.7 percent contraction, while a bit later on Friday the University of Michigan’s gauge of consumer sentiment fell to a final May reading of 90.7, compared with a final April level of 95.9.
Therefore, the 3 percent annualized growth for the second quarter expected by many economists is too optimistic. The Atlanta Fed’s GDPNow model forecasts 0.8 percent. And the final reading may be much lower, as it happened in Q1 (at the beginning of March, the model forecasted 1.3 percent growth). What is also important is that companies are considering now their current inventory level as too high. This means that the inventory rebuild is not going to pull us out from the slowdown.
Thus, the recent weak economic data should be negative for the U.S. dollar and positive for the gold market. The rising uncertainty on Greece could support the greenback, but the Hellas’ crisis should increase the demand for safe-havens and be supportive also for the gold prices.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
Gold News Monitor
Gold Trading Alerts
Gold Market Overview
