The December Nonfarm Payrolls Report was considered as a sign of the U.S. economy’s strength. In reality, the U.S. economy is slowing down. What does it mean for the gold market?

Let’s face it. The U.S. economy is decelerating. In the first quarter of 2015, real GDP grew at a 2.9 percent year-over-year. In the second quarter, the growth rate declined to 2.7 percent; while in the third quarter, the growth rate dropped even more to 2.1 percent. And regarding the fourth quarter, the Atlanta Fed's GDPNow forecast for Q4 real GDP is only 0.8 percent (updated as of January 8, 2016).

Surely, the U.S. economy looks pretty well when compared with other countries. However, the relative strength does not preclude internal problems. Let’s summarize them: the manufacturing is in recession, inventories are rising, credit spreads are widening, corporate profits are under pressure, the strong greenback is hurting exports, the mining boom is bust, and the global economy is slowing down. To make matter worse, auto sales, the brightest spot in the U.S. economy last year, lost its momentum and slumped to a seasonally adjusted 17.34 million units last month.

Many analysts ignore the weak industry, pointing out that it contributes only 15 percent of GDP. They are wrong, since manufacturing is the driver for economic growth and it is much more important for the economy than the share in output would suggest. As a reminder, the housing market in 2007 was considered too small to have an impact on our economy. We cannot imagine stable and solid job creation without strong industrial production. Usually, manufacturing ISM is a leading indicator of jobs.

Therefore, the U.S. labor market is less healthy than it is commonly believed (the labor force participation rate is below 63 percent), and there are downside risks to payrolls growth, especially that many states have increased minimum wages since the beginning of 2016. New regulations may increase hourly wages, but they will drag on hiring.

To sum up, the U.S. economy is slowing down and we see more downside than upside risk for it. If investors realize that the U.S. economy is decelerating, the safe-haven demand for gold should rise. In the current environment, we are skeptical about a few interest rate hikes this year. The more gradual pace of tightening than expected will be positive for the gold.

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

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