Real Income

GDP? Industrial production? Yield curve? 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 inflation. 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 the personal income from the Personal Income and Outlays Report, 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 negative correlation between these two data series. It makes sense, as real income may decline either because inflation 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 (the Great Recession is 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 CPI, so it attracts less interest and has significant effects on gold futures. Hence, although they might be sometimes insightful, it seems that precious metals investors should focus on other measures than real incomes.