Personal Income Levels and the Forex Market (Forex Education)
By Al Parsai | August 27, 2010 7:33 AM EST
Forex market investors usually base their trade decisions or strategies upon macroeconomic data that's presented throughout the month. These "economic indicators" can seriously affect where an economy is headed - for the better or worse. In fact, after a release of a particularly strong economic indicator, the currency rate can actually decrease or increase within a matter of a few hours. One such indicator is the Personal Income and Outlays Report.
Like its name suggests, the Personal Income and Outlays Report (also termed the Personal Consumption Report) measures monthly changes in both personal income and consumption levels. For this report's purpose, personal income is defined as income derived from a number of different sources - wages, dividends, rental income, etc. Personal consumption relates to purchases of any goods and services.
What's crucial in the personal income side is determining the actual disposable income, which is defined as the amount of after-tax income remaining once personal consumption and savings are taken into account. The higher the personal income and the lower the savings, the better it is for GDP figures (and the country's currency rates). On the flip side, the lower the personal income and the higher the savings rate, the worse it is for the GDP (and a country's currency rates).
Besides the personal income side of the report, the personal consumption factor, or the personal consumption expenditures also influences the overall economic direction of the country. With higher expenditures (and less savings), the economy grows in a positive direction. With lower expenditures (or consumption), the economy can eventually move in a negative direction. However, higher expenditures can also reflect inflationary pressures (prices rise, though actual consumption rates can stay the same). That's why the Personal Consumption Expenditure portion of this index is an extremely valuable tool when measuring a country's inflationary pressures.
The Personal Income and Outlays Report is released four to five weeks after the actual reporting period. For this reason, this index is not as powerful a tool as it can be since it is not the timeliest of reports. Even so, it is a highly regarded economic indicator.