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Level 5 Economics - Retail Sales

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

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/retail/


The data released covers the previous 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, meaning that activity reflects the current state of the economy. It is also considered by many as a vital pre-inflationary indicator, which creates the biggest interest from forex traders, Wall Street watchers and the Conference Review Board, which tracks data for the Federal Reserve Board's directors.

The release contains two main components: a total sales figure (with a related percentage change from the previous month), and one that is "ex-autos", because the large ticket price and historical seasonality of vehicle sales can skew the total figure disproportionately.



What it Means for You
The release of the Retail Sales Report has been known to result in relatively high volatility in the stock market. Its clarity as a predictor of inflationary pressure can cause investors and traders to rethink the likelihood of Fed rate cuts or hikes, depending on the report's results. For example, a quick 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 an attempt to curb possible inflation. This may cause investors to sell bonds (resulting in higher yields), and could pose problems for stocks as well, as inflation causes decreased future cash flows for companies. Not to mention the affects the interest rate hike would have on the currency, as we have already learned.

However, if retail sales growth is stalled or slowing, this means consumers have reduced their spending, and could signal a recession due to the significant role personal consumption plays in the health of the economy. In which case traders would be well served to take advantage of the country's weakening currency.

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

Strengths of the Retail Sales Report:


  • The retail sales data is very timely, and is released only two weeks after the month it covers.
  • The data release is robust; traders 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 of the Retail Sales Report:


  • Revisions to the report (released about two months after the advance report) can be very large, and the sample size is relatively small compared to the number of retailers.
  • Retail sales data is often volatile from month to month, which makes trend-spotting difficult at best.
  • The indicator is based on dollars spent and does not account for inflation. This can make it difficult for individual traders 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 current state of the economy. It provides detailed industry information and can really move the markets. Traders will often wait for the analysts to sort through the report, removing any overly volatile components, and drawing conclusions from there. For highly sophisticated traders however, being able to draw your own conclusions from the report can give you a jump-start on any trends that you may spot.

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