U.S. Economy Charges Ahead, Bad News for Gold (At Least in the Short Run)

July 18 2018

213,000 news jobs were added in June. Wages rose by 2.7 percent compared to a year earlier. However, the unemployment rate rose to 4.0 percent, up from 3.8% a month earlier. Yet, there is no shortage of not just good, but amazing news for the U.S. economy.

The U.S. Job Machine Is Running at Full Speed

213,000 jobs added is particularly good news, since this number shows that the U.S. job machine is continuing to run at full steam. The U.S. economy needs about 120,000 new jobs every month to compensate for the growth in total labor population. At a pace of 200,000 new jobs every month, the U.S. job market easily makes up for that increase in the labor population, creates ample opportunities for job seekers andemployed who are looking for a promotion.

The fact that jobs and job opportunities are abundant, means that companies are increasingly forced to compete for laborers. A proven method to attract the right employees, is simply by offering higher wages. The result is a 2.7 percent increase in wages. And that percentage increase is pretty close to an ideal wage growth rate.

What I mean by that, is the following: a wage rate increase of 2.7 percent, leads at the very least to employees not having to face a deterioration of their purchasing power. The inflation rate is currently between 2 and 2.5 percent, depending on which measure you use, that implies that workers are actually slightly getting ahead.

 

All this is good news, because on the one hand it leads to greater spending, while on the other hand it leads to increased optimism about the future, which also produces higher spending down the road. Hence, money is rolling, and that means nothing short from high economic growth, at least for the moment.

An increase in wage rates of 2.7 percent is, at the same time, not sufficiently high to expect that companies, faced with higher and rising costs, will raise their prices. If that would happen, then we would face a significant upward pressure on prices. This, in turn, would not only mean that employees will see their purchasing power decline, but also that the Fed could be forced to raise interest rates faster and higher than the central bank is currently willing to.

In short, all of the above means that we will continue to see a combination of slightly increasing purchasing power, growing economic optimism, and the expectation of a slow and rather limited rate hike trajectory in the U.S.

Is Trump Improving the Purchasing Power of Americans?

The recent and continuing decrease in unemployment, as part of a broader picture, could be called excellent news. The U.S. unemployment rate has risen in June, because more people who previously did not bother to look for a job, are currently looking for one. As such, they are registered as active job seekers and are only then officially marked as unemployed. Earlier, they would not even bother to look for a job, since they were convinced that the odds of finding a job was close to zero. The fact that they currently are registering themselves as active job seekers, proves that at this point they expect to have better chances of finding a job.

One of the consequences of this, is that even if the number of newly added jobs continues at its recent highs, no additional upward pressure on wages should result. After all, companies are fishing from a pond that has a fresh flow of new fish. Admitted, this also means that we should not expect an improvement in the purchasing power of American households, but appearances can be deceptive. The purchasing power of households can also increase by other means, for instance when income taxes are lowered, which produces additional spending power for Americans. As a fact of a matter, coincidentally, American president Donald Trump just lowered income taxes earlier this year!

On a macro-economic level, this means that the Fed’s plans to gradually raise interest rates (read: five times between now and Christmas of 2019) do not have to be altered, in the sense that additional or sooner rate hikes are not necessary.

Because low interest rates keep supporting stock market prices and prevent potential trouble with highly indebted households and businesses, there are plenty of reassurances to remain optimistic about the U.S. economy for the remainder of 2018 and 2019. The prospect of rate hikes and continuing growth – and, as such, pretty neat returns – could easily make precious metals a rather unattractive investment for the moment.

There is, however, one aspect to the rise in unemployment that seems reason for concern for the longer haul, which could easily influence the direction and speed of a movement in precious metals prices in the coming years. More on that in a series of articles in the coming weeks.

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