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Consumer spending makes up a whooping 70% of all US economic activity. Retail sales account for 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. As a result, we can see the retail sales report as one of the best indicators of change in consumer spending patterns.

But retail sales also has 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.

How is it measured?

Survey 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 let to develop 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 do I interpret it?

There’s risk in relying too much on the advance estimates of retail sales because they are based on a small sampling. A more accurate sense of the underlying trend is consumer spending patters 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 moto vehicles and auto-related products. This auto category can be extremely volatile from month to month and acnd 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 does 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 (which is bullish for the dollar), 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.

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