By Ryan Barnes

Release Date: On or around the 13th of the month
Release Time: 8:30am Eastern Standard Time
Coverage: Previous month\'s data
Released By: Census Bureau and the U.S. Department of Commerce
Latest Release: http://www.census.gov/svsd/www/advtable.html


Background
Retail Sales is very closely watched by both economists and investors. This indicator tracks the dollar value of merchandise sold within the retail trade by taking a sampling of companies engaged in the business of selling end products to consumers. Both fixed point-of-sale businesses and non-store retailers (such as mail catalogs and vending machines) are used in the data sample. Companies of all sizes are used in the survey, from Wal-Mart to independent, small-town businesses. (For related reading, see Using Consumer Spending As A Market Indicator.)

The data released will cover the prior month's sales, making it a timely indicator of not only the performance of this important industry (consumer expenditures generally make up about two-thirds of total gross domestic product), but of price level activity as a whole. Retail Sales is considered a coincident indicator, in that activity reflects the current state of the economy. It is also considered a vital pre-inflationary indicator, which creates the biggest interest from Wall Street watchers and the Conference Review Board,which tracks data for the Federal Reserve Board's directors.

The release will contain two components: a total sales figure (and related % change from the previous month), and one "ex-autos", as the large ticket price and historical seasonality of auto sales can throw off the total figure disproportionately.

What it Means for Investors
The release of the Retail Sales Report can cause above-average volatility in the stock market. Its clarity as a predictor of inflationary pressure can cause investors to rethink the likelihood of Fed rate cuts or hikes, depending on the direction of the underlying trend. For example, a sharp rise in retail sales in the middle of the business cycle may be followed by a short-term hike in interest rates by the Fed in the hope of curbing possible inflation. This would cause investors to sell bonds (causing yields to rise), and could pose problems for stocks as well, as inflation causes decreased future cash flows for companies.

If retail sales growth is stalled or slowing, this means consumers are not spending at previous levels, and could signal a recession due to the significant role personal consumption plays in the health of the economy.

One of the most important factors investors should note when viewing the indicator is how far off the reported figure is from the so-called consensus number, or "street number". In general, the stock market does not like surprises, so a figure that is higher than expected, even when the economy is humming along well, could trigger selling of stocks and bonds, as inflationary fears would be deemed higher than expected.



Retail companies themselves can be especially volatile with the release of this widely read industry report. The release data will show the sales performance of all the component sectors within retail (such as electronics retailers and restaurants), allowing investors to peek in on relative "pockets of strength" within the overall figures. An investor holding stocks in retail can see how his or her holdings are performing relative to the sector as a whole - a valuable analysis regardless of overall market conditions.

Strengths:
  • The retail sales data is extremely timely, and is released only two weeks after the month it covers.
  • The data release is robust; investors can download a full breakout of component sectors, as well as spreadsheet historical data to examine trends.
  • Retail sales reports get a lot of press. It's an indicator that is easy to understand and relates closely to the average consumer.
  • A revised report comes out later (two to three months on average), amending any errors.
  • Analysts and economists will take out volatile components to show the more underlying demand patterns. The most volatile components are autos, gas prices and food prices.
  • Data is adjusted seasonally, monthly and for holiday differences month to month.
Weaknesses:
  • Revisions to the report (released about two months after the advance report) can be quite large, and the sample size is relatively small compared to the number of retailers opening their doors to consumers.
  • Retail sales data is often volatile from month to month, which makes trend-spotting difficult.
  • The indicator is based on dollars spent and does not account for inflation. This makes it difficult for individual investors to make decisions based on the raw data.
  • Does not account for retail services, only physical merchandise. The U.S. is an increasingly service-based economy, so not all retail "activity" is captured.

The Closing Line
Retail Sales is one of the big ones - a report that can shed a lot of light on the economy. It provides detailed industry information and can really move the market. Investors will best be served by waiting for the analysts to sort through the report, removing any overly volatile components, and drawing conclusions from there. For owners of individual retail stocks, look at the sector growth rates to determine the relative performance of individual stocks held in a particular sector.

Next: Economic Indicators: Trade Balance Report »


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