Retail Sales and Personal Consumption Expenditures

Retail sales in general

Retail sales are an extremely crucial indicator for overall economic activity of any nation. The report on retail sales reflects the dollar value of merchandise sold within the retail trade by taking a sampling of companies, operating in the sector of selling physical end products to consumers. In the United States this report is released by the Census Bureau, which is a part of the Department of Commerce. In order to compile this report, the Census Bureau surveys about 5 000 companies of all sizes, from huge retailers such as Wal-Mart to independent small family firms. The retail sales report encompasses both fixed point-of-sale businesses and non-store retailers, such as mail catalogs and vending machines.

The report is usually released at 13:30 GMT (8:30 AM EST) on or around the 13th of each month.

Released data covers sales during the preceding month, which means that this is a timely indicator, gauging not only the performance of retail trade in a given country, but also price level activity as a whole. For example, in the United States consumer expenditures contribute to almost two-thirds of nations total GDP figure.

The report usually contains two components: a total sales figure (and a related percent of change in comparison with the prior month), and a “sales ex-autos” figure, also known as core retail sales. The latter is meant to remove large ticket prices and historical seasonality of automobile sales. Other volatile elements, which analysts can remove in order to reveal the more underlying demand pattern, are prices of food and prices of energy.

How do traders read the retail sales indicator?

Retail sales report is considered as a coincident indicator, which means that it reflects the current state of the economy. It is also considered a pre-inflationary indicator, which traders can use in order to reassess the probability of an interest rate raise or reduction by central banks.

In case retail sales in the Euro zone increase considerably during the middle of the business cycle, surpassing median estimate of experts, this may be considered as a signal for rising inflation, which may cause a short-term interest rate hike by the European Central Bank in order to ease inflationary pressure. Such a scenario may provide support to demand for the euro, but will trigger declines in prices of stocks and bonds.

On the other hand, in case retail sales decrease well below market expectations, this may be considered as a signal for suppressed inflation, which may even cause a cut in borrowing costs by the central bank. Such a scenario may put the national currency under selling pressure.

Increasing retail sales during a sluggish economy, however, is another thing. This can be considered as a sign that economy was in a process of revival. In such a context, rising retail sales would heighten the appeal of the national currency.

In case retail sales growth is stagnating, this could mean that consumers are not spending at sufficiently high levels in order to support economic growth, which could increase the probability of a recession.

A crucial moment, when examining retail sales, is to what extent the reported (actual) figure outperforms or underperforms the median estimate by experts. Beginner traders should note that a larger-than-projected rate of increase in the retail sales figure usually supports demand for a given currency, while lesser-than-projected rate of increase usually triggers selling of the given currency.

Example

Source: MetaTrader 4 by MetaQuotes Software Corp.

The chart above visualizes how EUR/USD reacts to the release of the retail sales report out of the United States at 13:30 GMT on December 12th. Overall sales climbed 0.7% in November compared to October and outpaced preliminary estimates of a 0.6% gain. The small green candle with long lower shadow marks a movement of about 20 pips in EUR/USD cross, which implies that US dollar received a certain support after the upbeat result.

Personal Consumption Expenditures in general

The Personal Consumption Expenditures Price Index, or PCE price index, represents one of the most important government measures of consumer spending on goods and services in the United States. Personal consumption makes up for two-thirds of total household spending in the country, while also accounting for more than 70% of the economic output, which is measured by nations Gross Domestic Product. The PCE price index measures the average increase in prices of durable and non-durable goods and services purchased by individual consumers, families and the non-profit organizations serving them.

The PCE index is based mainly on information from the GDP report, unlike the Consumer Price Index (CPI), which is based on household surveys conducted by the Bureau of Labor Statistics (BLS).

The Bureau of Economic Analysis (BEA) in the United States releases the PCE report each month, usually 30 days after the end of the month reviewed.

It is worth underscoring that in its “Monetary policy report to the Congress” from February 17th, 2000 the Federal Open Market Committee (FOMC) announced that it was changing its primary measure of inflation from the consumer price index to the “chain-type price index for personal consumption expenditures”.

Since it represents an index, the PCE indicator has a base year of 2005, when the base value was set to 100. The index reflects current personal consumption in todays prices and then compares it to the current personal consumption in prices during the base year (2005). Therefore, the PCE index provides a more lucid picture of overall inflationary trends in the economy.

How do traders read the Personal Consumption Expenditures Price Index?

In case the PCE price index increases, this is considered as an indication of potential inflation. In case the PCE price index decreases, this would indicate potential deflation.

If the index demonstrates a larger-than-expected increase during a given period (say a month), this is a signal that Federal Reserves inflationary objective is being approached, thus demand for the national currency (US dollar) would be boosted (traders would buy the greenback).

If the index demonstrates a lesser-than-expected increase during a given period, this means that inflationary pressure remains suppressed, thus traders would sell the US dollar.

In addition, the PCE price index is used to define how much households spend on consumption versus savings. Higher consumption levels suggest a larger GDP growth rate. On the other hand, a resilient savings rate favors longer-term economic health, as savings can be used in order to fund bank loans for mortgages and also for business investments.

Also, the PCE price index is used to understand trends in the sorts of goods and services bought by households. This index provides information regarding how shopping patterns change in response to unexpected price increases, for example in gasoline prices during the spring period. The PCE price index can be a valuable tool, with which to determine whether the demand for various goods and services is elastic or inelastic. If elastic, demand would decrease as prices surge. If inelastic, demand would remain almost unchanged despite the fact that prices rise.

Core value

Last but not least, the Bureau of Economic Analysis (BEA) also provides a core measure of inflation, or core PCE price index. This index excludes volatile components such as prices of oil, gas and food. We can say that the core PCE price index appears to be less volatile than the core Consumer Price Index (CPI), because the ways these two indicators are calculated differ. The formula used to calculate the CPI will likely report wide price swings in gasoline and computer technology, for instance, while the formula used to calculate the PCE price index is more likely to smooth out such price swings.

All in all, the PCE price index serves as a reliable basis, upon which the Federal Reserve Bank can adjust its benchmark interest rate in order to manage the rate of inflation.