RETAIL SALES: AN DEFINITION
Retail sales, also known as the Retail Sales Index (RSI), serves as a pivotal economic indicator, providing a glimpse into the overall health of an economy by revealing valuable information about consumer spending patterns. This report offers a comprehensive measure of retail goods and services over a specific time frame, but its composition may vary from one country to another.
In the United States, for instance, a significant component of the retail sales figure is attributed to auto dealers. To account for potential volatility arising from the auto industry, the Census Bureau excludes auto-related data, presenting separate figures for 'Retail Sales Ex Autos' and 'Retail Sales Ex Gas/Autos.' This exclusion is sometimes referred to as 'Core Retail Sales' in certain contexts.
Visually, the data may be represented in an economic calendar format, capturing the essence of consumer spending. Recognizing that consumer spending is a crucial metric that drives economic activity, businesses must closely monitor this data for informed decision-making regarding monetary and fiscal matters.
When consumer spending increases, it creates a positive impact on business activity, thereby stimulating the economy and attracting foreign investments. This positive ripple effect extends to other critical economic components, such as durable goods orders, consumer confidence, balance of trade, GDP, and inflation, among others. Hence, understanding and analyzing retail sales data play a vital role in shaping a company's well-being and shaping economic policies going forward.
HOW IS CONSUMER SPENDING CALCULATED? SAMPLES OF CONSUMER SPENDING
The U.S. retail sales index is a composite of various types of retailers, sourced from the U.S. Census Bureau. These categories include:
1. Motor vehicle and parts dealers
2. Furniture and home furniture stores
3. Electronics and appliance stores
4. Building material, garden equipment & supplies dealers
5. Food and beverage stores
6. Health and personal care stores
7. Gasoline stations
8. Clothing and clothing accessories stores
9. Sporting goods, hobby, musical instrument & book stores
10. General merchandise stores
11. Miscellaneous store retailers
12. Non-store retailers (online)
13. Food services & drinking places
The weights for each category are determined based on a predefined sampling frame, subject to periodic changes.
RETAIL SALES AND INFLATION
Optimistic retail trade statistics should not be unquestioningly accepted, as the number disclosed by the RSI remains unaltered for inflation. An encouraging number, after adjusting for CPI inflation, might yield an actual decline in retail sales. When inflation is elevated, the value of each dollar spent diminishes in terms of purchasing ability, underscoring the significance of accounting for inflation to achieve a comprehensive portrayal of the economy.
HOW TO TRADE RETAIL SALES?
Trading retail sales can be complex, but certain historical and significant connections exist between RSI and other markets. Initially, in the equity markets, there is typically a positive correlation between retail sales and stocks, as increased sales lead to higher company earnings. The chart below demonstrates how the U.S. equity markets (SPX) closely follow variations in retail sales data, aligning well with the retail sector represented by the SPDR Retail ETF (orange).
U.S. retail sales, S&P500 index, SPDR retail ETF, 2017, 2018, 2019, 2020, 2021, 2022:
Given that a significant portion of U.S. retail sales comes from auto sales (approximately 20% of the index), investors interested in the automotive industry can gain insights from the motor vehicle subcategory to assess the present condition and near-future prospects for local automotive manufacturers. The chart provided illustrates the connection between the two variables, emphasizing the positive correlation between retail sales data and the performance of two leading companies in the sector, namely Ford Motor Company and General Motors Company. This reasoning can be expanded to other subcategories and applied as a valuable input for stock analysis in their respective industries.
U.S. Retail Sales vs. Ford Motor Co. & General Motors Co. (2012-2022):
RETAIL SALES IN FOREX MARKET
As a general rule of thumb, improved retail sales typically correlate positively with the home currency's strength, while also contributing to market volatility before and after the release. Looking at the U.S. as an example, retail sales data can significantly influence the decision-making process of the central bank (Federal Reserve). For instance, if retail sales are slowing down, it might signal a bleak economic outlook, prompting the Fed to adopt a loose monetary policy by cutting interest rates in hopes of stimulating the economy. Conversely, if retail sales are growing, the Fed might take a different approach.
Supporting this positive correlation between currency and retail sales, the chart below illustrates a 6-month snapshot of U.S. retail sales data and the Dollar Index (DXY). The graph clearly demonstrates a direct association between these two variables. However, as with any financial market analysis, it's essential to consider other factors that may be at play during the evaluation process.
US RETAIL SALES VS DXY (2022)
RETAIL SALES: A SUMMARY
Retail sales can benefit traders regardless of their chosen trading style, whether it involves technical analysis, fundamental analysis, or a blend of both. Comprehending retail sales data can enrich one's grasp of financial markets and the underlying economics driving specific price fluctuations. Retail sales are versatile and can be integrated into all financial market asset classes, encompassing stocks, foreign exchange (FX), commodities, and fixed income, rendering it an exceptional macro indicator for the overall market.
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Basis-of-Macroeconomics