General definition
The Retail Sales Index is a report that considers the sales of goods in the retail sector during the previous month. This is a monthly figure, which always refers to the previous month in which the Census Bureau and the Department of Commerce of United States issued the report. This report is compiled and issued approximately two weeks after the end of the month.
This index is based on data obtained from samples that are extrapolated to the entirety of the whole country.
Relevance of the Retail Sales Index
Given that two-thirds of the gross domestic products of the United States consist of consumption, it is clear that the data provided by the Retail Sales Index is essential to know the state of the economy. The indicator includes data of store sales, catalog sales and other sales that occur outside the stores.
The report is divided into groups like food and beverages, clothing and cars. The results are often presented in two ways: by counting or not the car sales data. The reason to include or not the car sales data is that the high prices of sales/purchases of cars can add volatility to the data compiled by this report.
The importance of this index lies in its comparison with the previous year’s data so that the seasonal retail consumption data can be measured and analyzed. For example, an isolated one month can be misleading when compared with another month of the same year, so that an investor can make inappropriate investment decisions. However, when comparing a one-month data with the data from the same month of the last year, the trader can conclude effectively how sales are evolving in similar periods, which deseasonalize the data.
Effects of the indicator in the market
The Retail Sales Index is a basic tool for investors to have a clear understanding of how the retail sales are behaving as a way to assess the progress of the country’s economy because it reveals how it’s performing the consumption in the United States, which is a very important part of the national gross domestic product of that country.
In addition, retail sales data are taken into account by those investors who invest directly in a company of the retail sector due to the impact that these data can have on the share prices of the company and its expectations of future dividends.
When the index is rising, investors can expect that the stock market will rise due to an increment in corporate benefits, as more sales and higher profits usually involve more dividends accordingly. The revaluation of the equity markets and economic growth coupled with the expansion of retail sales strengthen the country’s currency, which generates more confidence in investors of financial markets.
When the consumption gets a boost and causes an increase in retail sales, the economy goes into a virtuous circle of growth and investment. In this case, the increase in sales results in the creation of new jobs and new businesses and consumers tend to consume more and companies tend to sell more, which in turn leads to greater growth and investment.
The economic boom generated by the increase in sales will surely attract international investors, who must buy the domestic currency to purchase shares of the stock market of the country, awaiting its revaluation. These investors also will invest directly in the creation of new businesses, or in the expansion of existing companies. Because of all this, the country’s currency will increase its value sooner or later.
On the bond market, we can say that an investor could envisage a scenario quite negative if the retail sales indicator is growing. The reason is that if the demand is increasing, as indicated by this indicator, it is likely that prices rise and inflation increase as a result. Consequently, the growth of the economy and inflation will cause an increase in interest rates, and as a result, a depreciation of bond prices in the market along with an increment in the profitability of the new bonds issued.
