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Sales Drive Forward
Subject Retail Sales
Topic Aggregate Demand
Key Words GDP, Economic Recovery, Retail Sales
News Story

Retail sales for the month of December rose 1.2 percent according to recently released figures from the Department of Commerce. Leading the increase in retail sales was a 5 percent gain in automobile sales. Although many had hoped for a dramatic rise in sales over the Christmas season, the 1.2 percent gain was sufficient to keep the economy growing. For 2002, retail sales were up 3.4 percent, the smallest gain since 1993. Consumer spending accounts for two-thirds of Gross Domestic Product (GDP), so the outlook for consumer spending is critical to the economic recovery.

Retailers were not positive about December sales. Except for the growth in auto sales, retail sales were virtually unchanged last month, and department store, sporting-goods outlets and food and beverage store sales all decreased. However, retail sales varied significantly for different products. For example, sales at electronic and appliance stores jumped by 6.3 percent, drugstore sales were up 8 percent and sales at furniture outlets increased by 4.2 percent.

It is difficult to draw conclusions from an examination of retail sales data, especially those in recent months. Economists believe that fourth quarter spending will be 2 percent, significantly lower than the 4.2 percent growth recorded in the third quarter. Retailers frequently do not make adjustments for falling prices when reporting sales, thereby masking some of the underlying trends in sales. According to one economist, adjusting sales data for price changes would reveal that retail sales rose 5 percent for all of 2002, instead of the 3.4 percent that was reported.

There are some bright notes, however. Compared with December 2001 data, retail sales were 4.6 percent higher this year: the largest yearly increase since 1999. Throughout 2002, consumers purchased a record 6.5 million homes, and automobile sales took a jump in December. Consumer purchases of homes and cars likely caused some of the reduction in sales of other goods and services.


(Updated April 3, 2003)

Questions
1.

Why are retail sales such closely-watched economic indicator?

2. Retailers typically report retail sales for stores that have been in business for at least a year in order to gauge the performance of continuing operations. The Commerce Department does not make that distinction and collects data for all stores. Can the two measures give conflicting information? Which measure is more relevant to an economist looking to forecast future performance?
3. As the article indicates, prices for some goods have fallen and this may have distorted retail sales data for some operations. What impact do falling prices have on measures of retail sales? Should retail sales data be adjusted for price decreases? If so, how could this be done?
Source Jon E. Hilsenrath, "Retail Sales Rose 1.2% in December," The Wall Street Journal, January 15, 2003.

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