Why Retail Sales Are Important

••• Joe Raedle / Staff / Getty Images News

Retail sales are an important economic indicator because consumer spending drives much of our economy. Think of all of the people and companies involved in producing, distributing, and selling the goods you use on a daily basis like food, clothes, fuel, and so on.

When consumers open their pocketbooks, the economy tends to hum along. Retail shelves empty and orders are placed for replacement merchandise. Plants make more widgets and order raw material for even more.

However, if consumers feel uncertain about their financial future and decide to hold off buying new refrigerators or blue jeans, the economy slows down. This is why politicians sometimes resort to tax rebates to give the economy a boost. By putting cash in consumers’ hands, they hope to spend their way out of a recession.

Monthly, the Census Bureau releases the Retail Sales Index, which is a measure of retail sales from the previous month as determined by a sampling of stores both large and small across the country. Although subject to future revision, the market closely watches this number as an indicator of the nation’s economy.

The report actually lists two numbers. The first is Retail Sales and the second number is Retail Sales Ex-Auto, or without automobile sales included. The reason for the second index is that auto sales can skew the overall number because they are such big-ticket items and are also subject to seasonal fluctuations.

The number crunchers on Wall Street come to their own conclusions before the Census Bureau issues the report, and that number is usually close. However, if the “street consensus” and the actual report differ significantly, beware of abrupt reactions from the market—as the one thing it does not like is a surprise.