NOTE: This is the third in an occasional series of stories explaining how major economic reports can affect the stock and bond markets.
As the consumer goes, so goes the expansion. That's an essential mantra among economy watchers because consumer spending accounts for two-thirds of real gross domestic product. Not surprisingly, the monthly retail sales report produced by the Census Bureau of the Commerce Dept. is a must-have for investors.
Since the advance data--the first tally of sales--are released about nine business days after the end of every month, the retail sales report is the government's first look at how consumers are behaving. According to Evelina M. Tainer, chief economist for the Web site Econoday (www.econoday.com), stock and bond markets are usually divided in their hopes for the retail numbers. "The bond market likes sluggish retail sales because that points to a slower overall economy," while "strong retail sales are good for stocks," she says, because that signals healthy business activity. Except that right now, markets aren't reacting to retail sales numbers in the usual way. Today, Tainer notes, both markets are wary that an overheated economy will impel the Federal Reserve to hike short-term interest rates for the third time since June 30.
The August retail report comes out at 8:30 a.m. on Sept. 14. It's one of the last major economic indicators to be released before the Federal Open Market Committee's next rate-setting meeting Oct. 5. Wall Street expects an 0.8% increase, vs. 0.7% in July. But with retail sales already running a robust 9% ahead of last year's pace, another strong report may spell a down day for fixed-income and equity investors alike. You can see the report as it is released at www.census.gov/cgi-bin/briefroom/BriefRm.
The report that Wall Street follows with such keen interest has a complex makeup. It starts out as mail-in surveys to stores ranging from mom-&-pop establishments to megachains. The advance report, such as the one due on Sept. 14, carries results from about 4,100 retailers. In the following month, the number will be revised to cover more complete sales totals for up to 10,000 vendors. But adjustments tend to be modest. Retailers from car dealers to department stores to restaurants are covered in the government's report. Web retailers are included as well, but their sales still account for less than 1% of the nearly $3 trillion in annual retail activity.
Given that most Americans are inveterate shoppers, you may think that interpreting the retail numbers is a straightforward matter. But analyzing the numbers can be as tricky as finding a swimsuit that fits well. For one thing, the data are grouped by stores, not by types of merchandise. Buy a bottle of aspirin at the local Food Lion, and it shows up as a grocery-store receipt, not as a pharmacy sale. And Tainer cautions that sales of motor vehicles, some 20% of all retail buying, are notoriously volatile. That's why Census publishes a nonauto retail number. Look at that figure for the real trend in consumer spending, says Tainer, especially if dealer incentives have temporarily boosted car sales for a month.
Because retail sales are not adjusted for inflation, Tainer also warns investors to be wary of price changes. For example, rising energy prices can boost sales at gasoline stations, even though the sales tallied by gallons may show no increase at all. The retail sales data eventually work their way into the monthly consumer spending report as well as into the quarterly GDP release. And policymakers use the report as a major clue for tracking the economy's health. That's why if you're looking for early information on how the economy is doing, the retail sales report should be high on your shopping list.