Yesterday, the second GDP estimate for the second quarter was published by the Bureau of Economic Analysis. It was up from the initial estimate. What does it mean for the U.S. economy and the gold market?
The U.S. economy grew at a faster 3.7 percent annual pace in the second quarter, up from the preliminary estimate of a 2.3 percent growth. Therefore, the U.S. looks much more robust in the second quarter than previously thought, however, why should investors care about the revisions for the second quarter, if they live in the third quarter and are interested in the outlook for the fourth quarter? Just as a reminder, the initial 0.2 percent growth in the first quarter was revised to -0.7 percent, then to -0.2 and finally to 0.6 percent. The estimates of the second quarter are similarly unreliable. Why should investors trust numbers that vary so much from revision to revision? And – as we wrote in May – why should investors trust the official GDP numbers with double seasonal adjustments, hedonic price measurements, imputations and imputations, and so on?
The reason why the revision may be important is that some analysts argue that the upward revision of the GDP for the second quarter puts the September interest rate hike again back on the table. We are not so sure. Abstracting from the fact that the GDP is an inherently flawed metric, the Fed is future-oriented, while the GDP is a lagging indicator (especially its revision). And the future is not so bright, as the upward revision was partially caused by the rise in inventories. The inventories contributed 0.22 percentage point to the GDP instead of subtracting 0.08 percentage point as reported last month. So, the inevitable inventory liquidation will likely weigh on growth in the future. Indeed, the GDPNow model forecasts real GDP growth in the third quarter of 2015 at only 1.4 percent. Additionally, the gross domestic income, which theoretically should be equal to the GDP, grew by a meager 0.6 percent in the second quarter.
The bottom line is that the U.S. second quarter GDP was revised upward. Although the number may provide the pretext for the Fed to hike interest rates, the central bankers are future-oriented and they should not be guided by lagging indicators and their volatile revisions. Therefore, the revision should not impact significantly the gold market. However, the inevitable liquidation of the accumulated inventories – which partially boosted past growth – will likely weigh on future growth, which may be positive for the price of gold, when it takes place.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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