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Getting the basics straight on retail sales [ClearOnMoney]
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Getting the basics straight on retail sales

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Commentary

Getting the basics straight on retail sales

18 Jan 2010 by Jim Fickett.

Most news reports on retail sales imply that retail is 70% of the economy. In fact it is about 30%, and the trend in retail sales is not the same as the trend in consumer spending generally.

Last week, on 14 Jan, the Census Bureau released the Advance Monthly Retail Trade Report for Dec 2009. Almost every news report on the topic, perhaps to impress on the importance of the numbers, mentioned that consumer spending drives 70% of the economy.

A random example, from a Canadian Press article entitled Retail sales drop 0.3 pct in December, plunge for year; new jobless claims rise:

The Commerce Department said Thursday that retail sales declined 0.3 per cent in December compared with November, much weaker than the 0.5 per cent rise that economists had been expecting. … Consumer spending is considered critical to any sustained economic revival because consumer spending accounts for 70 per cent of total economic activity.

There is so much muddy thinking in the news that it would take Hercules diverting rivers to clean it up. But this case is important, consistently misrepresented, and quite misleading.

According to the Census Bureau report, estimated

  • retail and food service sales for the year 2009 were $4.1 trillion.

According to the Bureau of Economic Analysis, Table 1.1.5 of the National Accounts,

  • GDP as of Q3 2009 was $14.2 trillion (seasonally adjusted, annual rate).

In math that even a reporter with a looming deadline should be able to manage, 4.1/14.2 = 29%. The 70% figure comes from the accounting category of Personal Consumption Expenditures in the National Accounts. In Table 2.1 we see that Personal Consumption Expenditures were $10.1 trillion (again seasonally adjusted at an annual rate). 10.1/14.2 = 71%.

So what's going on and why does it matter? According to the Census Bureau, retail sales are defined as follows:

Sales include merchandise sold (for cash or credit at retail or wholesale) by establishments primarily engaged in retail trade. …

They do not include sales at retail by manufacturers, wholesalers, service establishments, and others whose primary activity is other than retail trade.

So retail sales do not include services. Now the headline number from the monthly Retail and Food Services report does, of course, include food services. But it does not include the cost of housing or hotels, utilities, health care, transportation services, recreation services, or insurance and other financial services. Hence the difference between 29% and 71%.

The trend in retail sales is not necessarily the same as the trend in healthcare costs, housing, etc. For example, true to form, healthcare costs have increased steadily throughout the crisis, unlike retail sales.

So when trying to judge household cash flows, or the health of the economy, keep in mind that retail sales are closer to 30% than 70% of the economy. Very important, but an accurate picture includes a number of other very important components of consumer expenditures as well.