A rise in household spending suggests that disposable household income is improving. This is likely a result of wage growth. Consumer spending drives business momentum and accounts for two-thirds of US economic activity. A rise in consumer spending leads to an increase in prices for goods and services followed by increased inflation.
Biggest gain in four months
The BEA (U.S. Bureau of Economic Analysis) reports consumer spending in the US on a monthly basis. In March, US consumer spending rose by a seasonally adjusted 0.4% month-over-month—the strongest gain in four months. US spending decreased by 0.2% and 0.3% in December 2014 and January 2015 before rising 0.2% for February.
The Atlanta Fed President, Dennis Lockhart, said on May 6 that consumer spending needs to increase for a bounce back in US growth.
Meanwhile, the Fed has been less successful in meeting the objectives in the second part of its mandate. The PCE (personal consumption expenditure) is running lower than the Fed’s target.
Importance for gold investors
Since consumer spending forms two-thirds of the US economy, it’s important to watch out for this variable. Increasing consumption has a positive impact on inflation. Inflation is positive for gold because it’s considered an inflation hedge. In contrast, a consistent uptrend towards the Fed’s goal will lead it to a hike in interest rates. This will be negative for gold and gold-backed ETFs like the SPDR Gold Trust (GLD) as well as gold stocks like Newmont Mining (NEM), Gold Fields (GFI), and Kinross Gold (KGC). Combined, these three stocks account for 14.4% of the VanEck Vectors Gold Miners ETF (GDX).