What Does Excluding Items Mean?

Excluding items refers to the common practice of leaving certain factors out of an overall calculation to remove the volatility that might otherwise impact its comparability or distort long-term forecasting. Items that are highly volatile can obscure long-term trends over short periods. Also often excluded are items that reflect one-time events that could otherwise produce anomalous spikes in economics data series or financial statements.

Key Takeaways

  • Excluding items is the practice of deliberately leaving some information out of calculation or reported data in order to eliminate short-term or spurious volatility and get at the long-term, underlying trend.
  • Economic and financial decisions often depend more on long-term expectations or prospects, and less on day-to-day random variation. Excluding items can improve the quality of the information used, and so improve the quality of decision making. 
  • Corporate financial statements and publicly reported economic data are often subject to reporting with excluded items.

Understanding Excluding Items

Making good financial and economic decisions depends much more on long-term trends in the relevant data than on temporary, short-term, or one-time fluctuations. Whether you are are an investor looking to build your retirement plan, a banker considering the creditworthiness of a borrower, a CEO guiding the strategy of a corporation, or an economic policymaker setting the course of macroeconomic policy, you probably care more about the big picture than the immediate random noise of individual events.

Random ups and downs in markets, day-to-day variation in sales of big-ticket items, or one-time adjustments to natural events, such as storms or heat waves, can create enough short-term variation in financial and economic data that they temporarily swamp the underlying trends. However, over time, the long-term trends usually will dominate short-term volatility. Since expectations of future are what really matter for decisions made in the present, it makes more sense to pay attention to these trends.

In order to get an accurate picture of long-term trends, excluding items that mainly reflect short-term random fluctuations or one-time events is helpful. This leaves the items that better represent the future prospects for whatever type of data is being considered, in order to make a better informed decision for the future. 

Financial Statements

Excluding items often refers to items removed from the calculation of some earnings per share numbers. Such items may include one-time or extraordinary expenses or income. These types of income or expenses can produce a large jump in earnings for period or two that may understate or overstate the underlying profitability over a time frame that is relevant for an investor or shareholder.

Consumer Prices

The practice of excluding items is also common in the calculation of price indices. For example, the Consumer Price Index (CPI) is commonly reported excluding two highly-volatile items—food and energy prices—to obtain the so-called "core inflation" index. The Bureau of Labor Statistics (BLS) began producing versions of the CPI excluding food and energy in the late 1950s, when those series first appeared in the annual Economic Report of the President. "CPI ex food and energy" first appeared in the report in 1980. Many national statistical agencies produce similar inflation measures, and many central banks refer to these measures as guides for monetary policy.

Retail Sales

Retail sales data for the economy is a closely watched indicator of the health of the consumer sector. However it is often reported not in total, but as retail sales excluding auto sales. Because automobiles are big ticket items that a large proportion of consumers own, but buy only once every few years on average, and because auto purchases are typically financed, auto sales can be very volatile and sensitive to seasonal, financial, and other factors that reflect something other than the true trend in consumer behavior. For this reason, it can make sense to exclude auto sales from total retail sales. Gasoline sales are also often excluded both for volatility and because changes in gasoline retail sales often represents price changes rather than changes in unit volume of sales, due to the relative price inelasticity of demand for auto fuel. Retail sales excluding autos and gasoline is also known as core retail sales.