Around the middle of every month, at half past eight in the morning Eastern time, the United States statistical agency announces how much money consumers spent in shops. It sounds like a detail for economists, yet for the currency market it is one of the more important signals about the health of the world's largest economy. Retail sales speaks directly to what drives that economy most — the wallet of the ordinary American.

What retail sales actually measures

Retail sales is a monthly gauge of the value of goods, and some services, bought by American consumers at shops, restaurants, car dealerships, petrol stations and online retailers. It is published by the Census Bureau, the United States statistical agency, in a release called the Advance Monthly Retail Trade Report. The word "advance" in the title matters: this is an early, fast estimate that is later revised as fuller data from companies arrives.

The figure you see in the economic calendar is usually the month-on-month change expressed as a percentage. A reading of half a percent means Americans spent half a percent more in that month than in the previous one. The data is seasonally adjusted so that the December rush of holiday shopping or the summer holidays do not distort the picture — we are comparing the current month with the prior one, not a single raw December against November.

Why the consumer is two thirds of the economy

The key to understanding why this release matters to the currency market at all lies in the structure of the American economy. Consumer spending accounts for roughly two thirds of gross domestic product in the United States. That means when the American consumer buys, the economy grows, and when they tighten the belt, the engine begins to stall. No other single component carries as much weight as private consumption.

Retail sales is the fastest available window onto this most important part of the economy. The full picture of growth — the gross domestic product reading — only appears a few weeks after the quarter ends and is a sum of much earlier data. Retail sales arrives every month and says, here and now, whether the engine is speeding up or slowing down. That is why investors treat it as a monthly pulse of American demand and count it among the core releases of fundamental analysis worth knowing by heart.

„Consumer spending accounts for approximately two thirds of economic activity, so any report that measures the strength of the consumer carries a great deal of weight for the markets." — Kathy Lien, Day Trading and Swing Trading the Currency Market, Wiley, 2016.

The control group, or the cleanest signal

Experienced observers do not look only at the headline figure. The full report has several layers, and the most important of them is called the control group. This is retail sales after stripping out the four most volatile components: cars, petrol, building materials and food services.

These four are cut out for a reason. Car sales can leap or collapse from one month to the next and skew the headline heavily. The value of petrol changes mainly with the price of oil rather than the genuine strength of the consumer. Building materials depend on the weather and the construction cycle. Once that noise is removed, what remains is a clearer picture of how much the average American is really spending. The control group also matters for a more technical reason: it is precisely the measure that feeds into the calculation of gross domestic product. So for the market it can matter more than the headline itself — a strong headline driven solely by a jump in fuel prices can turn out to be weak once you look inside the control group.

How the reading feeds into the dollar

The mechanism that links retail sales to the dollar runs through expectations for the Federal Reserve's interest rates. Strong consumer demand sustains growth, but at the same time it stokes pressure on prices. When the consumer spends heavily, the Fed has less reason to rush into rate cuts — it can keep policy restrictive for longer. Higher interest rates, in turn, attract capital seeking returns, which usually supports the dollar.

It works the other way too. A clearly weaker reading suggests the consumer is pulling back, the economy is losing momentum, and the central bank may be forced to ease policy to sustain it. That prospect usually weakens the currency. As with every macro release, what matters to the market is not the number itself but the gap between it and the analysts' forecast — a result above expectations is dollar-supportive, while one well below it weakens the dollar. The principle that the market prices the surprise rather than the value itself is set out more fully in our piece on how to read an economic calendar.

Why the reaction is often smaller than it could be

Although retail sales carries great economic weight, its effect on the rate is usually smaller than that of the two loudest releases of the month — the non-farm payrolls jobs report and the inflation reading. This stems from the nature of the data. Retail sales is highly volatile and routinely revised, so the market treats a single reading with a degree of caution and waits to see whether the following months confirm it.

That does not make the release unimportant. When a reading diverges clearly from the forecast, or when it changes the whole narrative about the economy — for instance as the first hard signal that the consumer is beginning to weaken — the reaction can be significant and the move on dollar pairs pronounced. It works most strongly when the headline and the control group say the same thing, because then the picture is unambiguous. When they pull apart, the market waits for confirmation and reacts more cautiously.

Your next step

  1. Find the next release in the calendar. Open any economic calendar, set the time zone to your local one and look up US retail sales around the middle of the month, at half past eight Eastern time. Note the date so it does not catch you out while you hold an open position.
  2. Learn to read the three layers of the report. At the next reading, check the headline, sales excluding cars and the control group side by side. Notice whether they say the same thing — they are what decide whether the signal is clean or mixed.
  3. Compare the result with the forecast, not with zero. Before you judge a reading as good or bad, set the actual value against the analysts' consensus from the calendar. Only that gap tells you whether the consumer surprised the market or merely confirmed expectations.
  4. Keep your risk away from the minute of the release. If you are just starting out, do not place market orders in the window just before and right after the print, because the spread widens and slippage rises. Wait for the first reaction to cool, and only then judge the direction.