Stronger economic growth isnt all that it seems
While next weeks presidential election dominates headlines and stokes investor fears, recent economic reports continue to paint a placid picture of U.S. economic health.
Last Fridays news on 3rd Quarter Gross Domestic Product is a prime example. The initial reading for Q3 GDP came in at 2.9% annual growth, the strongest quarter in two years.
This favorable report helped raise the likelihood of a December Federal Reserve rate hike. The probability of a quarter-point increase at the Feds December 14 climbed as high as 75% in recent days, according to CME Group.
Beneath the surface, however, the economic waters are churning. That means gold should continue to shine for investors who are looking to diversify their holdings and preserve the value of their wealth from a possible severe market downturn.
While the headline growth number was strong and points toward a continuing recovery, not all economists were impressed by the report. The Wall Street Journal noted the robust GDP figure was juiced by several one-time events, including a jump in exports largely driven by a record soybean harvest.
Even with the boost in GDP in the Q3 report, the trend of economic growth remains anemic at best. Over the previous four quarters, the average annual GDP growth rate sits at a weak 1.5%. Earlier this year, many economists expected U.S. economic growth to be well north of 2% for all of 2016.
Whats holding the U.S. economy back? One factor has been consumer spending, a primary driver of U.S. economic growth.
Personal spending rebounded in September by 0.5% after a three-month slowdown, including a 0.1% decline in August. But consumers outlook about future spending, which depends largely on their prospects for work and income, has been on a steady downward trend as of late. The University of Michigan index of consumer sentiment hit its lowest point in two years this past October.
Then there are concerns about inflation. Septembers annual inflation rate was reported at 1.5%, the highest level in two years. That number largely reflects higher prices drivers were paying to gas up their vehicles during the month.
Perhaps more significantly, the Feds preferred inflation indicatorthe personal consumption expenditures index, which strips out volatile energy and food prices was steady in September at 1.7% on an annual basis. Thats below the Feds stated target of 2% annual inflation rate, indicating that a fair amount of price weakness remains in the economy.
Inflation expectations over the longer-term have swung higher over the past year, according to market indicators from bond investors. At a 10-year break even level of 1.74%, expectations for future prices increase are still well below long-term averages, but these indicators are much higher than where they were at the start of this year.
A major worry that investors and economists see in this mixed bag of data is a future of higher inflation without a corresponding increase in economic growth. Rising prices would be expected in a time of expansion. But in the absence of economic growth, higher inflation would be a sign of poor health in the broader economy.
Financial markets are right to show concern. A recent spike in the VIX index, otherwise known as the markets fear gauge mostly reflects anxiety over a Trump election victory as the GOP candidate shows surprising strength in the latest polls. On November 1, the VIX closed at its highest level since the Brexit-related market turmoil in June.
But fears about the strength of the U.S. economy also persist. The most recent reports reveal an economy struggling to fire on all cylinders. The U.S. economic engine appears to be running well at first glance. But a look under the hood shows potential warning signs that could stall the current recovery.
The sum of these fears continues to support strength in gold prices. The yellow metal continues to shine, even after a rise of 20% for the year-to-date. Once the uncertainty around the election is settled, there are enough concerns about the economy to hold investors attraction to gold for the near term.