? Industrial production? ? Who cares? At the end of the day, what really matters is how much money you bring home. Or, to be more precise, how much real stuff you can buy for money that inflows your bank account each month. This is what we call real income – it’s income adjusted for . We make this correction to measure the amount of goods and services individuals can purchase. For example, if one’s salary increased 2 percent over the year, but inflation was 3 percent, the real income of that person actually decreased by about 1 percent. Hence, real income is a more useful indicator of people’s well-being than nominal income.
Real income is one of the few key indicators the NBER take into account in determining the date of recessions and expansions. The institution uses thefrom , less current transfer receipts, in chained dollars. The NBER excludes the government benefits because, unlike other sources of income, they are countercyclical (more people receive income from the government during recessions), so they would distort the picture of the people’s income over the business cycle.
Real Income and Gold
Let’s analyze the chart below to determine what is the link between real incomes and gold prices. As one can see, there is a slightly negativebetween these two data series. It makes sense, as real income may decline either because goes up or because people get lower salaries in nominal terms which is a sign of economic problems.
Chart 1: NBER’s real income (red line, left axis, real personal income less current transfer receipts, in percent change y-o-y) and the price of gold (yellow line, right axis, London P.M. Fix, in $) from January 1972 to November 2018.
However, the correlation is very low, around -0.15, so we would not draw too far-reaching conclusions. We see periods when gold goes up when the pace of growth in real incomes drops below zero (theis a great example), but also when it goes down (as it was the case in 2013). Another problem with real incomes is that its updates come out later than other indicators, such as retail sales or the , so it attracts less interest and has significant effects on . Hence, although they might be sometimes insightful, it seems that investors should focus on other measures than real incomes.
We hope you enjoyed the above definition. We encourage you to learn more about the gold market – not only about the link between real incomes and gold, but also how to successfully useand how to profitably trade it. Great way to start is to sign up for our . If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Back