Consumer spending makes up a whooping 70% of all U.S. economic activity. Retail sales account for about one-third of that.
If consumers keep spending, it’s a sign of overall economic growth.
To monitor such expenditures, the Census Bureau calls thousands of retailers each month for their latest sales numbers. This is why we can see the retail sales report as one of the best indicators of change in consumer spending patterns.
But retail sales also does have certain shortcomings.
It only represents spending on goods, such those found at electronics stores, department stores, auto dealers, gas stations, and restaurants.
The report tells us nothing about spending on services such as air travel, dental care, haircuts, insurance, and movies. Yet the service business makes up almost two-thirds of personal expenditures.
Also, the initial monthly retail sales release known as the advance report, tends to be extremely volatile and often misleading. It’s fairly common for the government to report that retail sales fell one month, only to have them revise it later to show an increase.
Last but not the least, the report doesn’t factor in inflation. That is, improvements or deterioration in the value of retail sales could very well be due to higher or lower prices and not stronger or weaker spending.
How is it measured?
Surveys are sent out randomly to 5,000 large and small retailers around the country. These businesses receive them about three days after the month ends and are supposed to respond within a week or so. However, fewer than 50% of the retailers reply back in time.
Still, the government reviews the data to prepare for the advance retail sales report – the first of three releases for that month. This advance report offers a quick and dirty assessment of changes in consumer spending patterns.
Another 8,000 retailers are polled days later to develop a more complete picture of what shoppers are doing.
Results from that survey lead to the first statistical revision, which is known as the preliminary version. Four weeks later, the final report with additional revisions, is released. Generally, of the 13,000 surveyed, about 75% respond.
How should you interpret it?
There’s risk in relying too much on the advance estimates of retail sales because they are based on a relatively small sample.
A more accurate sense of the underlying trend are consumer spending patterns that can be found by monitoring sales on a three-month moving average basis or by looking at the last three months worth of data and comparing it with the same three-month period the year before.
What is retail ex. auto?
Roughly 25% of total dollars spent on retail sales goes toward purchases of motor vehicles and auto-related products. This auto category can be extremely volatile from month to month and can distort the larger retail sales picture.
To offset this, there is a separate line in the report where the government strips out the auto spending component so one can better track the underlying trend in consumer spending.
How can it affect the dollar?
The currency markets find the retail sales report a tricky indicator to analyze.
While foreigners prefer to see American consumers in a shopping mood because that would firm up interest rates, an overly strong retail sales number can also spell trouble for the dollar because many of the goods are imported.
A jump in imports increases demand for non-dollar currencies to pay for all these foreign products – and that can potentially hurt the dollar.
But these days, a strong retail sales report would be a welcome sight for investors.
Remember that Fed members have been singing praises about the economy as they justify their plans to raise their interest rates thrice this year.
A strong reading would support their cause and likely boost the dollar, while a weak release could extend the anti-dollar momentum from earlier this week.
Tomorrow at 12:30 am GMT Uncle Sam will print its advance retail sales numbers for the month of March.
Analysts are expecting the headline figure to show a 0.1% decline as gas prices extended its slide. Meanwhile, the core figure is expected to show a 0.3% growth after popping up by 0.2% in February.
Take note that a lot of European traders are out on Easter holiday during the release. This means that the report could inspire more volatility than the usual and could cause ruckus on tight stops.
In any case, make sure you manage your risk well if you’re planning on trading the event!