Yesterday, two regional manufacturing reports came out. Manufacturing activity flattened in Richmond and declined in Texas. What does it mean for the U.S. economy and the gold market?
According to the Federal Reserve Bank of Richmond’s survey, manufacturing activity in the fifth district remained soft in May, with the composite index for manufacturing moving to 1 following the April reading of -3. The report published by the Federal Reserve Bank of Dallas looks much worse. The production index, a key measure of state manufacturing conditions, fell to -13.5, its lowest reading in six years, while the general business activity index fell to -20.8 in May, its lowest reading since June 2009. New orders remained deeply negative, at minus 14.1, following 14.0 in April, contracting a fifth month in a row. And the employment index declined 10 points to -8.2, after rebounding slightly above zero last month.
Unfortunately, Texas is not the only state hit hard by the contraction in the energy sector. Manufacturing activity declined also in Kansas. The month-over-month composite index for the tenth district was -13 in May, down from -7 in April and -4 in March, while the production index contracted from -2 to -13, to the lowest level since mid-2009. It seems that the Kansas and Dallas regions are in recession. It is hardly surprising for us, as we pointed out in our May Market Overview that “bankruptcies in the energy sector usually lag oil price crashes by around one year since mining companies generally hedge their output on the futures markets for such horizon”. It means that we can see an even larger slowdown in energy-producing regions. It is negative news for the U.S. economy, since practically all jobs in the U.S. between December 2007 and December 2014 were gained in Texas. However, what is not good for the U.S. economy is often positive for the gold market. The recession in Kansas and Dallas implies significant layoffs. According to the private consultancy Challenger, Gray & Christmas, 61,582 jobs were cut in April, a 68% surge from March, and up 53% from a year ago, including 22,760 jobs lost in Texas.
Just as a remainder, manufacturing and labor conditions worsened also in Philadelphia, where the diffusion index of current activity decreased from 7.5 in April to 6.7 in May, while business conditions in New York improved slightly in May, although they remained weak and came weaker that forecasted by the economists.
To sum up, although the orders for core capital goods rose by 1 percent in April, the latest few regional reports for May look weak, which could be reflected in the next Beige Book. The economic slowdown, if not recession, in Texas should significantly drag on national economic growth, which should give the edge to the doves at the Federal Reserve and support the gold prices.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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