U.S. consumer spending rose 0.4 percent in May. What does it mean for the gold market?

Personal consumption expenditures moderated in May, increasing just 0.4 percent after 1.1 percent rise in April. The slowdown resulted mainly from a dropoff in sales of new cars and trucks. The chart below shows that although the annual pace of growth is lower than in 2014, it accelerated since the end of 2015. The number is not impressive, but shows that the U.S. economy is moderately expanding, despite the weak growth in the first quarter. The GDPNow model forecast for real GDP growth in the second quarter of 2016 increased after the release of the report from 2.6 percent to 2.7 percent. It is bad news for the gold market.

Chart 1: Personal consumption expenditures from 2011 to 2016 (as percent change from year ago).

Personal consumption expenditures

The income side of the report was definitely weaker, as personal income increased just 0.2 percent, following a 0.5 percent rise in April. It was the smallest gain in three months. The modest increase in income forced Americans to dip into their savings a bit – the personal saving rate dropped from 5.4 percent to 5.3 percent. On an annual basis, the pace of growth of real personal income is in the downward trend, as one can see in the chart below.

Chart 2: Real personal income over the last 12 months (as a percent change from year ago)

Real personal income

And what about inflation? Both the PCE price index and its core version, which excludes food and energy, increased 0.2 percent in May, following 0.3 percent rise in April. On an annual basis, the PCE price index jumped 0.9 percent, while the core PCE price index rose 1.6 percent. It means that the inflationary pressure eased compared to April, as one can see in the chart below. Inflation is still below the Fed’s target and there is little evidence that it is about to accelerate. The low rate of inflation will not give the Fed officials arguments to raise interest rates very soon, which sounds pleasantly for the gold market.

Bottom line

The April Personal Income and Outlays report was not weak, but was weaker than month ago. It is consistent with the moderate economic growth, but it should not provide the FOMC hawks with strong arguments to hike. Mr. Market is betting that the U.S. central bank will not raise interest rates until 2017, which should be welcomed by gold investors.