Gold price jumps as U.S. Q1 GDP contracts 1.4%
(Kitco News) - The gold market remains below $1,900 an ounce but has pushed into positive territory, attracting some new bullish momentum after the U.S. economy contracted in the first quarter of 2022.
Thursday, Commerce Department said the advanced estimate showed U.S. Q1 GDP fell 1.4% versus markets' expectations of a 1% increase.
"The decrease in real GDP reflected decreases in private inventory investment, exports, federal government spending, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased," the report said.
The gold market has jumped higher in initial reaction to the disappointing economic data. June gold futures last traded at $1,894.40 an ounce, up 0.30% on the day.
Economists were looking for slower economic growth compared to last year's fourth-quarter growth of 6.9%. However, the report said that the COVID-19 pandemic continued to impact economic activity.
"In the first quarter, an increase in COVID-19 cases related to the Omicron variant resulted in continued restrictions and disruptions in the operations of establishments in some parts of the country," the report said. "The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the first quarter because the impacts are generally embedded in source data and cannot be separately identified."
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Avery Shenfeld, senior economist at CIBC, said the drop in U.S. GDP is a shock; however, some of the weaknesses can be explained by trade imbalances.
"Real GDP decreased at an annualized 1.4% in Q1… But that was heavily weighed down by a drop in exports as some of America's trading partners are not as far along in the recovery, a tilt in U.S. demand that drew in imports, and much lighter inventory accumulation that chopped 0.8% from the growth rate," he said.
Some analysts also note that inflation remains a significant concern for consumer demand. The report said that advanced reading in the GDP Price Index rose 8%, well above expectations. Economists were looking for a rise of 7.2%.
Shenfeld said that despite the slower growth, the inflation threat will keep the Federal Reserve on track to aggressively raise interest rates this year.
"Inflation, the real concern these days, saw core PCE prices up 5.2% from the prior year, and that is starting to put a squeeze on household spending power, with the savings rate dropping by just over 1% this quarter. While the growth pace was a shock to the downside, until employment growth slows, the Fed will be focused on hiking rates to bring those inflation pressures back down to the earth, making next week's payrolls numbers more relevant to the pace of monetary tightening," he said.