Economic Indicators: Retail Sales Report

The Retail Sales Report, released monthly by the U.S. Census Bureau, is very closely watched by both economists and investors. The Census Bureau has been releasing the report since 1951 and they adjust the sample of retail outlets used every five years to stay current.

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 online sellers) 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.) These companies provide data including retail sales and month-end inventories.

Why it’s important

The data from the Retail Sales Report is widely used by various government agencies, academic analysts and researchers, economists, businesses and investors. It is a component in the calculation of Gross Domestic Product, a key economic indicator.

The Fed uses this data to analyze recent trends in consumer purchases as part of their overall analysis of the economy and recent trends. The results of the report are widely reported by the financial media. Investors use the data to measure trends in consumer spending as part of their overall analysis of business and economic trends, and of industries impacted more directly by this data.

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.

If retail sales growth is stalled or slowing, this means consumers are not spending at previous levels, and could signal a possible 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 could trigger selling of stocks and bonds, as inflationary fears would be deemed higher than expected.

Strengths:

• The retail sales data is extremely timely, and is released within two weeks after the month it covers
• The data release is robust; investors can download a full breakout of component sectors, as well as a spreadsheet of historical data to examine trends
• 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:

• 20% of all retail sales take place during Christmas/New Year’s holidays each year, so seasonality is a major factor
• 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 total number of retailers
• 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, making 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