The U.S. personal spending rose 0.9 percent in May. What does it mean for the U.S. economy and the gold market?

According to the Department of Commerce, Americans increased their consumption by 0.9 percent in May. It followed an upwardly revised 0.1 percent rise in April and marked the biggest gain since August 2009. The latest report may indicate that economic growth was gathering some momentum in the second quarter and consumers came to life in May. Consumers spend some of their savings – the saving rate decreased from 5.4 to 5.1 percent in May – which may reflect their increasing confidence in the economy. And personal income rose 0.5 percent in May, which could foster optimism.

However, the savings rate is still above 5 percent, showing that Americans remain cautious. Indeed, consumer spending has risen at a modest 3.6 percent in the past 12 months, mostly due to lower gasoline prices. In other words, consumer expenditure was driven mainly by a surge in spending on energy goods and services, and new autos.

Anyway, the economic data in May was rather bullish, which could convince the FOMC members to hike interest rates this year. Personal incomes increased in line with expectations, while consumer spending, existing and new home sales rose more than expected. And U.S. GDP for first quarter was revised (as we had expected) from -0.7 to just -0.2 percent. Manufacturing remains essentially the only weak area (but the last reading of the Chicago Fed's national activity index at negative 0.17, a rise from negative 0.19 in April, showed that the overall U.S. economy was still running below trend in May). The orders for durable goods fell 1.8 percent in May, while the Markit Flash PMI dropped from 54 in May to 53.4 in June, the lowest reading since October 2013. There is also hope in low inflation. The PCE price index rose only 0.3 percent in May month-over-month, and just 0.2 percent on an annual basis. The core PCE index (without volatile food and energy) increased only 0.1 percent in May (month-over-month) and 1.2 percent on an annual basis.

The key takeaway is that consumer spending increased in May, which could spur the Fed to be more vigorous about tightening. To be sure, the U.S. economy is far from full recovery (especially with such a weak manufacturing sector), however the FOMC members may finally raise interest rates, if they believe that the U.S. economy is gaining momentum. This should be negative, at least initially, for the gold price, as higher real interest rates, could result in lower attractiveness of precious metals.

Thank you.

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

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