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Economic Reports Primer, Pt 5: Understanding Retail Sales Data

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May 31, 2016
Retail sales data: learn how consumer spending drives the economy and your trading strategy

Shopping, anyone? In the U.S., consumers make the economy go ’round. Consumer spending accounts for roughly 70% of U.S. gross domestic product (GDP).

Strong consumer spending can drive economic growth, as it did during the strong years of the late 1990s. Weak consumer spending can weigh on growth, as it has to some extent in recent times. Not surprisingly, the monthly retail sales report is a critical piece of economic data for Wall Street. It helps inform economists on the pace of overall economic growth and can provide trading opportunities when there are disparities between forecasts and the actual numbers.

"This is an important report and it generates a good bit of buzz when it is released," says Patrick O'Hare, chief market analyst at Briefing.com. "Economists look at it more closely with a three-month average, while the market and traders look closely on a month-to-month basis.”

Report name: Retail sales
Released by: U.S. Commerce Department
Release date: Around the 15th of each month
Release time: 8:30 a.m. ET

Best trait: Economists like this report because it is the first one each month on consumer spending. "It provides nice insight into consumer behavior," O'Hare says. The numbers are solid, too. "This is hard data coming from retailers. It is not a consumer sentiment survey. It is a report of what people are literally spending money on."

Good insight: While consumer spending accounts for close to 70% of GDP, the monthly retail sales report captures only spending on goods, not services. Services account for roughly two-thirds of consumer spending, while retail sales comprises the other third.          

One weakness: The retail sales data is measured in nominal terms and is not adjusted for price changes. What that means: "It can be difficult to determine whether a consumer is buying more of a product or if they are paying more for that product," O'Hare explains. Another weakness? It can be subject to decent-size revisions from month to month. Hang on to your hat, because markets can experience post-report volatility as economists and traders digest big revisions.

Tradability rating:
(a) Tends to be ignored. (b) Depends on overall trading climate. (c) Don't miss this one.

"This is a very tradable report, an 8 or 9 out of a 1-to-10 scale," O'Hare says. "Each month, the market is trying to figure out what retail sales say about the state of the consumer and ultimately what it means for the state of the economy."

Current read: Recent retail sales data has been lackluster, despite lower gasoline prices (from year-ago figures), low interest rates, and strong gains in the labor market. "You'd think consumer spending would be really strong. It's not negative, but not nearly as strong you as might think given all the positives," said O'Hare.

"Retail sales have been surprisingly tepid. This needs to be watched, as it is a key ingredient to help the U.S. economy achieve escape velocity—to be able to grow north of 3%," O'Hare says.

The April reading revealed a 0.3% decline in retail sales, and the initial estimate for Q1 GDP growth was a sluggish 0.5%. However, the June report surprised to the upside with a reading of 1.3% thanks to a sharp rise in auto sales.

Mark your calendar: The next retail sales report will be released June 14 at 8:30 am ET.

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