Last week was full of important economic news. We wrote about weak retail sales and the lack of CPI inflation, but until now we haven’t had time to discuss all new pieces of information. What do they tell us about the U.S. economy and how can they affect the gold market?

Let’s start with the recent anecdotal Federal Reserve report on economic conditions in its districts. The October Beige Book indicates a slowdown in the economy. The Richmond and Chicago districts reported that the pace of growth had slowed from mid-August until early October, while Kansas City noted a decline in economic activity. The growth in the rest of the districts was described as ‘modest’ or ‘moderate’. The strong greenback was mentioned as a headwind for tourism and manufacturing. Importantly, in the context of the FOMC October meeting, wage growth was “mostly subdued”. Although there were also some bright spots - consumer spending grew moderately and both the housing and commercial real estate markets improved since the last report – the Beige Book calls the prospect of a rate hike into question.

Another piece of important economic data released last week was the report on industrial production and capacity utilization. Industrial production decreased 0.2 percent in September, the second month of declines in a row. Industrial production declined in eight out of the last nine months, mainly due to a strong U.S. dollar and reduced capital expenditure in the energy sector. The capacity utilization for the industrial sector fell 0.3 percentage point in September to 77.5 percent, a rate that is 2.6 percentage points below its long-run (1972–2014) average.

Regarding other interesting news, the Producer Price Index, which includes wholesale costs, fell 0.5 percent in September, reflecting disinflationary pressures in the economy. Both the Empire State manufacturing index and the Philadelphia Fed’s manufacturing index completed the picture of devastation in U.S. manufacturing. The former remained in deep negative territory (-11.4) for the third straight month (importantly, new orders, shipments, and unfilled orders all declined at a steeper pace than last month), while the latter stayed in negative territory for the second month in a row (the new orders and shipments indexes turned negative this month, and labor market indicators also weakened). Manufacturing weakened in the whole country, since the national Institute for Supply Management manufacturing index decreased from 51.1 percent in August to 50.2 percent in September, just above the level indicating recession.

To sum up, the incoming data on the U.S. economy shows that manufacturing still struggles in the slow lane. This is good news for the gold market, as the industry will drag on the whole economy. It cannot be otherwise. The manufacturing sector is far more important to the economy than its contribution to GDP would suggest, because GDP does not count business spending on intermediate goods. Therefore, in reality manufacturing is the largest sector of the economy in terms of total output, so its growing weakness should hurt the whole U.S. economy, which would be fundamentally supportive for the price of gold.

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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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