Retail Sales: Definition, Measurement, and Use As an Economic Indicator

What Are Retail Sales?

Retail sales are an economic metric that tracks consumer demand for finished goods. This figure is a very important data set as it is a key monthly market-moving event. Retail sales are reported each month by the U.S. Census Bureau and indicate the direction of the economy. It acts as a key economic barometer and whether inflationary pressures exist. Retail sales are measured by durable and non-durable goods purchased over a defined period of time. Sales for the report are derived from 13 types of retailers from food service to retail stores.

Understanding Retail Sales

Retail sales are a good indicator of the pulse of the economy and its projected path toward expansion or contraction. Retail sales figures are reported by all food service and retail stores and compiled by the U.S. Census Bureau. The measurement is typically based on data sampling and is used to model the patterns for the entire country.

As a leading macroeconomic indicator, healthy retail sales figures typically elicit positive movements in equity markets. Higher sales are good news for shareholders of retail companies because it means higher earnings. Bondholders, on the other hand, are quite ambivalent towards this metric. A booming economy is good for all, but lower retail sales figures and a contracting economy would translate to a decrease in inflation. This may cause investors to gravitate toward bonds, eventually leading to higher bond prices.

Retail sales capture in-store sales, as well as catalog and other out-of-store sales of both durable (last for more than three years) and non-durable goods (those with a three-year or shorter life span).

These are broken down into a number of different categories including (but not limited to):

• Clothing and clothing accessories stores
• Pharmacies and drug stores
• Food and beverage stores
• Electronics and appliance stores
• Furniture stores
• Gasoline stations
• New car dealers

As a broad economic indicator, the retail sales report is one of the timeliest reports because it provides data that is only a few weeks old. Individual retail companies often provide their own sales figures at the same time every month, and their stocks can experience volatility as investors process the data.

Major changes in price can affect retail sales figures. These fluctuations in prices are seen primarily in two retail sales categories: food retailers and gas stations. Large increases in food and energy prices can cause sales figures to drop in both categories, thus affecting the sales of a particular month.

Special Considerations

An accurate measure of retail sales is incredibly vital for gauging the economic health of the U.S. This is because consumer spending, or Personal Consumption Expenditure (PCE), accounts for two-thirds of gross domestic product (GDP). Retail sales are reported in the U.S. every month.

The data for the report is collected by the U.S. Census Bureau in its Monthly Retail Trade Survey. The report, which is released in the middle of every month, shows the total number of sales in the measured period, usually the prior month, and the percentage change from the last report. The report also includes the year-over-year change in sales to account for the seasonality of consumer-based retail.

The sales figures are often presented in two ways: with and without the inclusion of auto and gas sales. Most economists choose to analyze retail sales without including car sales because these figures tend to fluctuate more than other sales. The same applies to gas station sales which are subject to oil and gas price volatility. The main reason that this volatile data stream is ignored is that consumers don't have a choice when it comes to consumption.

Retail sales are affected by seasonality. The holiday season is typically believed to have the highest level of sales. This is partly due to the holiday shopping season for Christmas. This time of the year accounts for a large portion of yearly sales for many retailers, primarily for hobby, toy, game, and department stores.

The Bottom Line

Retail sales is an important indicator that signals either the contraction or expansion of an economy. An increase in retail sales signals a healthy economy that is expanding while a decrease in retail sales signals the opposite. An increase in retail sales usually moves stocks upward and is good for shareholders.