You've seen a business cycle before and understand that it is normal for the economy to go through periods of growth and contraction.
Economists use many different kinds of data and indicators to help them determine three things:
Calculating retail sales is one leading economic indicator that helps economists predict where the economy is headed.
On a year-over-year basis, the amount of retail sales attributed to the same stores in a chain--thereby excluding the growth of new stores--are tabulated to determine if, over the comparative period, revenue has increased, decreased, or stayed the same.
It is very detailed and includes sales for specific industries:
So, not necessarily for macroeconomists, but for investors, it is quite helpful that this is broken down industry by industry.
If an investor is thinking about investing in a certain industry, or if they already have money invested in a certain industry, they can access this report every month and see what is going on in each industry.
The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for December, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $431.9 billion, an increase of 0.2 percent (+/-0.5%)* from the previous month, and 4.1 percent (+/-0.7%) above December 2012. Total sales for the 12 months of 2013 were up 4.2 percent (+/-1.7%) from 2012. Total sales for the October through December 2013 period were up 1.0 percent (+/-0.5%) from the same period a year ago.
Macroeconomists consider retail sales as a leading indicator in our economy. An increase in retail sales will often be a leading indicator itself to an increase in the CPI, which is yet another economic indicator.
This is because businesses are seeing an increase in sales, meaning an increase in demand for their goods and services, which is a signal to them that they can raise their prices. Therefore, when retail sales increase, we often see a CPI increase in the months following.
In addition, if there is an increase in retail sales from one period to the next, it is an indication that consumers are out there spending money, that they are confident in the economy.
It's also an indication that businesses might hire more employees and produce more, which are indicators that the economy could continue to grow into the future.
Conversely, a decrease in retail sales from one period to the next can raise concerns to macroeconomists about a potential recession coming.
As firms see a decrease or a tapering in their sales, they may begin to scale back on production, and subsequently lay off workers, cut hours, etc. In this manner, then, a decrease in retail sales can signal that we are potentially headed for a slowdown or recession.
Source: Adapted from Sophia instructor Kate Eskra.