American gross domestic product rose at an annual rate of 1.5 percent in the third quarter. What does it imply for the U.S. economy and the gold market?
The slowdown in GDP growth from a very strong 3.9 percent in the second quarter was larger than expected (the market consensus forecast was at 1.7 percent). The decline means that it is unlikely that the U.S. will break the 3 percent annual growth threshold this year, a level unseen since 2005. What is important is that virtually every component of GDP was weaker than in the previous quarter. Personal consumption expenditures (PCE) contributed 2.19 percentage points to the bottom line GDP number, down from 2.42 percent. Interestingly, healthcare spending was the biggest contributor in this category, which accounted for 30 percent of the total PCE’s input. Thus, it seems that Obamacare helped the economy. The contribution of government spending and fixed investment also dropped, in contrast to yesterday’s Fed statement that “business fixed investment have been increasing at solid rates in recent months”. In reality, companies cut spending on structures (e.g. oil platforms) and commercial buildings. Net trade (export less import) and the change in private inventories detracted from growth. Actually, the slowdown was caused mostly by the biggest drawdown in inventories in three years, which subtracted 1.4 percentage points after making a neutral contribution in the previous quarter.
Some economists believe, thus, that the economy is in much better shape and blame inventories for a slowdown. However, companies have been accumulating inventories for months due to a decrease in global demand. This is also why they have been reducing new orders for goods from other producers. Now, the inventory drawdown means that entrepreneurs cut production to reduce an inventory overhang. As firms reduce their output, many workers are laid off… Therefore, everything depends on the nature of the inventory adjustment – if this was a sharp one-off or the start of a new trend.
The key takeaway is that U.S. economic growth slowed significantly in the third quarter, however there is a long way to hit recession. The pace of growth is disappointing, but not yet disastrous, which would be a much better scenario for the gold market. Given that the Fed had to know the headline number yesterday, today’s report will not deter it from hiking in December. This is also bad news for the shiny metal.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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