Retail Sales and Its Components

Understanding the Economy Through Retail Activity

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Photo by Sophie Delauw/Getty Images 

Retail sales is the purchases of finished goods and services by consumers and businesses. These goods and services have made it to the end of the supply chain. The chain starts with the goods producer or provider and ends with the retailer. 

The beginning of the supply chain includes commodities and other raw materials. Manufacturers create the product. The middle of the supply chain is wholesale sales. They distribute the goods and services to retailers. The retailers sell them to the consumer.

Retail and Its Primary Job

The retail industry distributes all of these goods and services to customers. Retail outlets include brick-and-mortar stores like Target and Macy's. It also includes online retailers such as Amazon. Retail distribution also includes home sales such as Avon Products and TV retailers like QVC. The retail industry also sells services, including restaurants, hotels, and hairdressers.

The most critical time in retail sales is the holiday shopping season. It accounts for almost 20 percent of annual sales for many retailers. For jewelers, it accounts for 70 percent of yearly sales. The holiday shopping season officially begins on Black Friday, the day after Thanksgiving.

It also includes other big shopping days such as Cyber MondayGreen Monday and every other shopping day through Christmas. Some retailers have a "Christmas in July" sale to stir up sales during the slow summer season.

Measuring Sales and Trends

The U.S. Census Bureau measures retail sales with the monthly U.S. retail sales report. It reveals total sales, percent change, and change in year-over-year sales. 

The Census Bureau doesn't adjust for inflation in the report. That means volatile gas and oil prices affect its results. That can be misleading. Gas prices typically rise in the spring. Traders bid up the prices in advance of anticipated demand for the summer driving season. When that happens, it seems like retail sales are skyrocketing. Sales seem to drop like a stone in the late summer or autumn. That's when gas prices fall as vacationers return home. 

Retail Categories

The Census Bureau divides retail sales into 13 categories. The largest category (20 percent) is auto and auto parts stores. Since it's such a large component, the Census Bureau report also shows retail sales without auto. 

The following represent all 13 retail categories: 

  1. Auto dealers, including auto parts, new and used vehicle sales.
  2. Nonstore retailers, which means online retail sales.
  3. Department stores.
  4. Apparel, such as specialty clothing stores.
  5. Electronics and appliance stores, including big-box retailers like Best Buy.
  6. Food and beverage stores, including grocery and liquor stores.
  7. Building and garden supply stores, such as Lowes and Home Depot.
  8. Sporting goods/hobby stores, like Hobby Lobby and Michaels.
  9. Health/beauty shops, including drugstores.
  10. Furniture stores.
  11. Hospitality and leisure, including hotels, restaurants, and bars.
  1. Gas stations.
  2. Miscellaneous. (Source: “How Surveys Are Collected,” Census Bureau.)

Department and discount stores comprise 13 percent of total sales. Grocery stores are slightly less. Gas stations and restaurants are a little under 10 percent each. Apparel stores and drugstores come in at 5 percent each. Furniture stores and consumer electronics are around 2.5 percent each. 

Reflecting the Economic Environment

Retail sales tell you how much demand exists for consumer goods. That's critical because consumer spending makes up almost 70 percent of total U.S. economic output. The three other components of a gross domestic product are business spending, government spending, and net exports.

The Bureau of Economic Analysis releases the gross domestic product report each quarter throughout the year. If each month's retail sales are strong, then it's likely that the GDP report will be solid as well. The only time that won't be true is if prices are rising due to inflation. The retail sales report doesn't adjust for inflation. The BEA's report uses so-called real GDP, which does adjust for inflation. 

It's worth also looking at year-over-year retail sales in addition to the monthly percentage changes. The GDP report gives an estimate for a year. Retail sales growth since the prior year will give you a better indication of GDP growth which is also compared to the prior year. 

Pay attention to growth for each of the 13 specific categories within retail sales. Growth in auto sales will create more U.S. manufacturing jobs. If apparel is increasing, it won't likely increase U.S. jobs because most of those jobs are outsourced. Growth in hospitality and leisure will create jobs, but most of them are lower paid than manufacturing jobs.