Reflecting a sharp pullback in auto sales, the Commerce Department released a report on Wednesday showing an unexpected drop in U.S. retail sales in the month of April.
The Commerce Department said retail sales edged down by 0.2 percent in April after spiking by an upwardly revised 1.7 percent in March.
Economists had expected retail sales to rise by 0.2 percent compared to the 1.6 percent jump originally reported for the previous month.
The unexpected pullback in retail sales came as sales by motor vehicle and parts dealers slumped by 1.1 percent in April after soaring by 3.2 percent in March.
Excluding the steep drop in auto sales, retail sales inched up by 0.1 percent in April after surging up by 1.3 percent in March, although ex-auto sales had been expected to climb by 0.7 percent.
The uptick in ex-auto sales came as a jump in sales by gas stations was largely offset by significant decreases in sales by building materials and supplies dealers and electronic and appliance stores.
Closely watched core retail sales, which exclude autos, gasoline, building materials and food services, came in flat in April after surging up by 1.1 percent in March.
Andrew Hunter, Senior U.S. Economist at Capital Economics, said the unexpected dip in retail sales supports his view that GDP growth is set to slow in the second quarter.
“With net trade set to provide a much smaller boost and inventories likely to be a sizable drag, we continue to think that GDP growth will slow in the second quarter, to between 1.5% and 2.0% annualized,” Hunter said.
He added, “With last year’s fiscal boost fading and the drag from higher borrowing costs still feeding through, we expect growth to slow further in the second half of this year.”
Retail Sales Also Called Advance Retail Sales
The U.S. Census Bureau conducts the Advance Monthly Retail Trade and Food Services Survey to provide an early estimate of monthly sales by kind of business for retail and food service firms located in the United States.
The retail sales report captures in-store sales as well as catalog and other out-of-store sales. The report also breaks down sales figures into groups such as food and beverage, clothing and automobiles.
Each month, questionnaires are mailed to a probability sample of approximately 5,500 employer firms selected from the larger Monthly Retail Trade Survey (MRTS).
Advance sales estimates are computed using a link relative estimator. For each detailed industry, the Census Bureau computes a ratio of current-to-previous month weighted sales using data from units for which we have obtained usable responses for both the current and previous month.
For each detailed industry, the advance total sales estimates for the current month is computed by multiplying this ratio by the preliminary sales estimate for the previous month (derived from the larger MRTS) at the appropriate industry level. Total estimates for broader industries are computed as the sum of the detailed industry estimates.
For a limited number of nonresponding companies that have influential effects on the estimates, sales may be estimated based on historical performance of that company. The monthly estimates are benchmarked to the annual survey estimates from the Annual Retail Trade Survey once available. The estimates are adjusted for seasonal variation and holiday and trading day differences.
Core Retail Sales
Core retail sales refers to aggregate retail sales in the U.S. excluding automobile and gasoline sales, which are excluded due to their volatility.
Automobile sales account for about 20% of Retail Sales, but they tend to be very volatile and distort the underlying trend. The Core data is therefore thought to be a better gauge of spending trends.
Core retail sales data is used extensively by various government bureaus to calculate GDP, develop consumer price indexes and analyze current economic activity, while the Federal Reserve uses the numbers to assess recent trends in consumer purchases.
Core retail sales is also a strong indicator of economic health and whether it is contracting or expanding. Retail sales make up nearly one-half of personal consumption, which in turn accounts for nearly 70 percent of GDP. Retail sales, in terms of direct economic activity, accounts for almost one-third of GDP.
Retail Sales Data vs. Core Retail Sales Data
The difference between the U.S. retail sales numbers and U.S. core retail sales data is that core retail sales excludes autos and gasoline. Auto and gasoline components are excluded because they are often very volatile in price fluctuations. The Census Bureau releases retail sales data, for month over month (MoM) and year over year (YoY) percentage changes. MoM data is the more important of the two as this data series is more likely to show a surprise or unexpected reading; markets are also more likely to react to deviations from expectations in these numbers.
However, core retail sales data is released as month to month changes only. Data is also collected for a Retail Sales Control Group MoM change; this group excludes autos, gasoline and construction materials. All retail sales data is released monthly, approximately two weeks after the target month.
Why Markets Care About Retail Sales Report
Retail sales reports are a key economic indicator and reflect statistics culled from thousands of retail outlets and food service entities. Consumer spending accounts for two-thirds of GDP; therefore, retail sales are considered a major driver of the health of the U.S. economy.
Because retail sales are a measure of consumer demand for finished goods, they are an indicator of the pulse of an economy and its projected path toward expansion or contraction.
The percentage increases or decreases also give a good indication of how fast the economy is contracting or expanding. Very strong or weak retail sales can also put upward or downward pressure on prices
As a leading macroeconomic indicator, healthy retail sales figures typically elicit positive movements in equity markets.
Retail sales figures are vital to stock investors and particularly those who directly invest in retail companies. The figures are also a big component of the total gross domestic product (GDP) in the United States, so any extended drop-offs in retail spending can trigger a recession by lowering tax receipts and forcing companies to reduce their workforce.
As a broad economic indicator, the retail sales report is one of the timeliest and provides data that is only a few weeks old. Individual retail companies often provide their own sales figures at the same time per month, and their stocks can be volatile at this time as investors process the data.
Retail sales is the primary gauge of consumer spending, which accounts for the majority of overall economic activity.