January Consumer Spending And Gold

Last week, there was a massive US economic data dump. What does the release of several reports imply for the gold market?

Consumer Spending

The turn of February and March was a hot period full of speeches and important economic news. Let’s dig into them, starting with personal outlays. Personal consumption expenditures increased 0.2 percent in January after a 0.5 percent jump in December. The move was slightly below expectations due to a decline in durable goods. On an annual basis, consumer spending rose 4.7 percent. As one can see in the chart below, consumer spending has accelerated since August.

Chart 1: Personal consumption expenditures from 2012 to 2017 (as percent change from year ago).

Although nominally consumers are still spending at levels that propel the economy forward, real spending fell 0.3 percent. This is why the Atlanta Fed’s forecast of first-quarter real consumer spending growth dropped from 2.8 percent to 2.1 percent, while the forecast of real GDP growth declined from 2.5 to 1.8 percent after the release of the report.

Personal Income

The income side of the report was definitely more solid, as personal income jumped 0.4 percent in January, following a 0.3 percent increase in the previous month. The rise was slightly better than expected and – importantly – wages and salaries moved up in line with overall personal income. The uptick in wages should be welcomed by the Fed. And the pace of growth edged up on an annual basis, as one can see in the chart below.

Chart 2: Personal income over the last 5 years (as percent change from year ago).

PCE Price Index

The PCE price index rose 0.4 percent in January, after a 0.20 increase in the previous month, while its core version edged up 0.3 percent, after a 0.1 rise in December. On an annual basis, the PCE price index jumped 1.9 percent, which means acceleration from a 1.6 percent jump in December. The core index excluding food and energy prices rose at an unchanged pace of 1.7. Therefore, inflationary pressures strengthened significantly in January, as one can see in the chart below. Actually, U.S. inflation reached the highest level since 2012.

Chart 3: PCE Price Index (blue line) and Core PCE Price Index (red line) as percent change from year ago, from 2012 to 2017.

Although the inflation rate is still below the Fed’s target – and it may slow at some point this year when energy prices stabilize – the current acceleration should be welcomed by the FOMC members. As a reminder, the PCE index is the preferred Fed’s inflation gauge. The rate is nearly at the target and it will definitely put pressure on the U.S. central bank to raise interest rates at the nearest meeting, which is bad news for the gold market. The market odds of an interest rate hike in March are about 80 percent.

Other Data

When it comes to other data, there is mixed news. Consumer confidence increased from 111.6 to 114.8 in February, hitting a 15-year high (but the recent Beige Book showed that the business optimism has cooled a bit),the Chicago PMI jumped by 7.1 points to 57.4, the highest level since September 2014, while both manufacturing and non-manufacturing ISM indices were very strong in February. On the other hand, durable goods orders rose 1.8 percent in January, but the orders for core capital equipment orders declined 0.4 percent, which raises doubts about business investments. Pending home sales plunged 2.8 percent to a 12-month low, while construction spending tumbled 1 percent. The measure of real GDP growth in Q4 2016 was unchanged.

Conclusions

The take-home message is that the January personal income and outlays report was positive, on balance. Although real consumer spending declined and lowered the forecast of GDP growth in the first quarter, income growth could support consumer spending over the coming months, while inflationary pressures increased further. Hence, this report – although other economic news was mixed – supports the camp of U.S. monetary policy hawks who want to raise interest rates ‘sooner rather than later’, which is theoretically bad news for the price of gold. However, the probability of a rate hike in March may already be reflected in the price of gold. Stay tuned!

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor