Retail spending consists of about 40% of total personal consumption expenditures, while personal consumption expenditures account for about two-thirds of total spending in the economy. This means that total retail spending accounts for about one-third of all spending (GDP) and thus is an important indicator of the strength of the economy.
The retail spending report is backward looking and shows what consumers have done in the previous month. Yet, this information, together with information on consumer confidence and employment changes should allow reasonable deductions regarding the future of retail activity. It is also worth noting that the report contains end-of-month inventories, which are important indicators of pending shortages or surpluses.
While personal income is the major source of retail spending, consumer credit, especially non-revolving credit (home mortgages), has played a significant roll in keeping consumer spending from slowing recently.
Monthly Advanced Retail Trade Survey
To gain the most information from this indicator, it is important to understand the nature of the retail trade survey itself. The U.S. Bureau of the Census, Retail Indicators Division, conducts a written survey of about 12,000 different retail businesses, with a subset of 4,000 of these queried about end-of-month inventories. The information is processed and a preliminary report (called the “Advanced” report or MARTS ) based upon a representative sample of some 5,000 firms is released about two weeks after the close of the month. This is the report that is given attention by the financial press because it is timely and has a short two-week lag from the end of the month.
The full report — the MRTS — is released about six weeks following the close of the month and contains revisions to the advanced report as well as the previous twelve months. In addition, there is an annual revision made the previous year as well as the past thirteen years. In spite of the many revisions made to this series, some of which can be significant, the data is timely and is used to estimate personal consumption expenditures (part of Gross Domestic Product), consumer price level changes, and productivity measures in the economy.
A significant aspect of this survey is the industry detail it provides. Since there is some volatility in this series, usually associated with auto sales, the series is reported both with and without auto sales. Because of this volatility it is best to view any trends in spending in the context of a three-month moving average.
The reported results are adjusted for seasonal variation, differences in holiday dates, as well as differences in the number of trading days available.
A final caution to interpretation of the data is that the survey does not include service sector spending (healthcare, education, recreation, etc.), which accounts for some 55% to 60% of total personal consumption spending. In spite of this omission, the trends are viewed as representative of total retail spending.
Price level changes not measured
An important limitation of this data is the fact that there are no adjustments made for price level changes. Retail sales are reported in current dollars. When prices in any one sector are moving up rapidly, the reported increases in retail sales may not reflect an increase in physical volume of sales but some combination of volume increases and higher prices.
For example, gasoline sales were up in October by 27% over October 2004, but this change contains a combination of both price and volume increases. To accurately gauge the change in real retail sales, adjustment for price level changes must be made.
Consumer credit and retail spending
While disposable personal income is the primary source of consumer spending, consumers can increase their consumption expenditures through the use of credit. The two primary types of consumer credit are revolving credit and nonrevolving credit. Revolving credit includes credit card debt and store charge accounts and amounts to about 43% of total consumer credit debt. Nonrevolving debt includes auto loans, personal loans and loans for recreational vehicles. Changes in the amount of revolving and nonrevolving debt are reported monthly (a five week lag) by the Federal Reserve Board (www.federalreserve.gov) in a report titled Consumer Credit.
The use of mortgage refinancing in recent years to reduce record levels of revolving credit has made it important to broaden the examination of consumer finances. With record low interest rates on home mortgages, many consumers refinanced their homes in the last five years, used a portion of the proceeds to pay off revolving credit (credit cards) and a portion to supplement their consumption habits. In short, consumers have been replacing revolving credit debt with mortgage debt.
To gauge the impact of this activity on the consumer, the Federal Reserve Board issues a quarterly report titled Household Debt Service and Financial Obligations Ratios. An accompanying chart to this week’s column shows that the debt service to disposable income has reached record levels in 2005, topping 13% of disposable income.
With both mortgages and credit cards having variable interest rates, it is possible that if interest rates continue to increase in the next year debt services will take a larger bite out of disposable income and impact retail spending.
Watching for what?
When there are rapid price level changes in one sector, look for declines in other sectors as consumers adjust their spending to reflect the drop in real incomes.
Indeed, one of the fears of rising gasoline prices is that it will derail retail spending in other areas of the economy and potentially result in a slowing of the overall economy. This can be mitigated by rising hourly wages, increasing employment, falling savings rates or increasing consumer credit.
The key to understanding where retail spending is headed is understanding consumers’ overall financial situation and their attitude toward the economic future.
Next time, we’ll take a look at imports, exports and the related numbers that matter to the overall economic picture.
Dr. William D. Gunther is professor of economics and director of the Bureau of Business and Economic Research in the College of Business at the University of Southern Mississippi. Contact him via email at firstname.lastname@example.org.