Of all the various economic indicators and data points out there, is there one that has any special ability to forecast future economic activity?

Or defined more broadly, what gives the best insight into future GDP ?

That is the question Dave Livingston of Llinlithgow Associates (he blogs at BizzXceleration) was considering perusing when he noticed one metric in particular stood out: Retail Sales.

So Dave did what any good econo-geek would do — he a regression analysis between YoY changes in retail sales and other key indicators.  (See composite chart of Retail Sales, with
his Cheat Sheet table, below).

Dave acknowledges this “cuts some corners, but it might serve a useful quicklook purpose.” How? Every time there’s a new sales report you can guestimate GDP, Employment, Consumption, Investment changes.

It also operates on another level as a brutal reality check — look at what GDP growth rates are required to get Unemployment down from these levels.

Dave adds that despite all the caveats to this, the table below is a great thing to have in your wallet the next Wonk Dinner Party you attend — just whip it out and read off the economic outlook based on the latest headline!

>

click for larger graph

Category: Economy, Retail

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

28 Responses to “Economic Cheat Sheet: Using Retail Sales to Forecast GDP & NFP”

  1. Mike in Nola says:

    Not surprising that there’s some sort of correlation in a consumer-driven economy. Probably a different result in ones that are export driven. There probably would have been less of a relationship 50 years ago when we actually produced goods instead of trading pieces of paper.

  2. dblwyo says:

    Mike in Nola – a good point. Actually if you chart the relationships between Retail Sales, GDP, consumption, et.al. they follow the same patterns on a YoY basis for decades. As it happens these particular estimates (for Retail Sales, GDP, PCE) were estimated on data going back to 1950. The Employment and Unemployment data not as far and the Investment data only to 1995 because the BEA is still revising the tables. However before the recent table revision the same patterns held. So if/when there’s new data the parameters might change slightly but the basic relationships hold.

    In some sense you can pretty well take these to the bank, or given the “brutal reality” point, be taken to the bank…or foreclosure…or debtor’s prison. Let me underscore that – if we’re looking at 2.5% GDP growth thru 2020 it’s going to be very hard to get a robust recovery.

  3. Creamcicle says:

    Is there a way to figure out the dollar amount our government would have to spend to get us to each level of unemployment and what that increase in the money supply/deficit would do to interest rates/inflation and therefore investment, consumption, and net exports? In other words, is it feasible that the government turn on their money machines and start drawing up enough expenditures to get us down to lower unemployment levels without ridiculous effects to everything else, or would an increase in one have comparatively adverse affects to other pieces of American livelihood (short and long term)

  4. cognos says:

    Its kinda hard to make sense of what he actually means… bc some of the scales are different and he’s saying retail sales “annual” when the numbers (all the #s) are really monthly/quarterly.

    For example, we just did 0.5% or 0.6% for retail sales in Jan. This would be a +6-8% annual rate. Of course we did -0.1% for Dec. So on a 2-month basis it would be a +4-5% annual rate. Etc.

    It looks like his chart is saying, if we did +4% retail sales growth over the next 10-months… the unemployment rate would fall 2.4%. Is this correct? That makes some sense.

    BUT it looks like his chart is saying, if we did +2% retail sales growth over the next 10-months… the unemployment rate would RISE 3.3%… that makes no sense? AT ALL.

  5. dblwyo says:

    All welcome to the confusions of compression. The key here is that the data is talking about YoY% changes – which is usually not the headline number but in the last 18 months is more and more reported, a refreshing change. It’s also talking about real (inflation-adjusted data). You may have to expand the chart but in fact it does say if real retail sales goes up by +4% YoY then the Unemployment rate will fall by -2.4%; note, NOT the rate itself. So if Unemployment is at 10% then knock off -2.4%, i.e. it will drop to about 9.8% (making allowances for my bad math skills with basic algebra of course).

    I think the real message here is how long we’d need for growth to be at that level in real terms to get from 10% Unemployment to 5-6%. Especially given some reasonable projections that the new normal baseline is probably 6% because of structural adjustments.

    Does that help at all?

  6. flipspiceland says:

    Doesn’t GDP stand for Gross Domestic ‘Product’?

    If so, what relevance does GDP have in an economy that is only 15% manufacturing and 85% services?

    Measuring the value of services has been a bugaboo in economics since it first became evident that we can’t grow by taking in each other’s laundry. How much value does an estate lawyer render when he gets 5% of the estate for filing a few papers? Or the physician who can’t diagnose and treat an illness but still gets the same fee? Or the H & R Block tax preparer who adds nothing to the economy but the transfer of the client’s cash to his own checking account? Taken as a whole, services are likely worth 10% of what producing an Ipod or a machine that extracts coal in a long-wall mining operation does.

    The sleight of hand that has been going on for 60 years by the government hiding the majority of its liabilities off the balance sheet and devaluing the dollar makes any GDP number look ridiculous to be significant of anything.

  7. Jerry 369 says:

    …Creamcicle, I would say the latter. “Adverse affects to other pieces of American….” IMHO, there is just no long term solution to all this {globally}, but of more importance to us Americans, until we let things finally continue their decent and break. This will play out, weather we go kicking and screaming or not. I mean, be real. Greece. W.T.F.? This country is being given the chance of a lifetime, finally get their house in order. What’s the first response? “‘Frakin” {shout out to” Caprica”} union outrage and strikes. Govenor Christe in N.J. throws down the gauntlet and seems to get a real response from the pol’s in Jersey. This is what it will take, it’s math, plain and simple! The number’s just don’t add up any more. A child, your child could get the concept. Why can’t Barack Obama, Larry Summer’s, Geithner, etc…
    This will clear, it may take a very shallow depression like we find ourselves in now{my opinion}, or with the hard, left hand of government, we will get Great Depression 2.5. Something wicked this way come’s…
    The Euro coming apart? A week ago would have been scoffed at. Today? It’s not out of the realm of possibility. This is a massive belch after the world’s greatest all time drunken orgy of debt, consumption, and just wastefulness on a scale previously unseen in recent history. We as a people need to grow up and get serious. Bayh’s departure and seeming disgust with politics is a very positive sign. With the help of the Glenn Beck’s,{actually taking our current financial nightmare and making it easy to understand for the average person/ viewer}forgetting his politics for the moment.Full disclosure; I’m a libertarian Beck Head, for the most part. The more this get’s understood, really, fairly understood, we can start to fix thing’s.
    The teacher /police/ seiu/ all the unions need to get serious, harsh cut’s will take place. We can fight it, but the natural forces of depression will work their will no matter what. Then we will long for the time, to have had a say in our outcome, Obama be damned! This is going to be painful, to the degree of how painful? I opt for the time when our input can still gain favor {to whatever extent} that’s still possible. Deflation is way more hideous than inflation. Pain we face,but “We” are America,we can overcome anything! We will persevere!
    God bless this great country, thank a solider…
    Jerry

  8. cognos says:

    Glen Beck is insane.

    Practically no one in this country understands — LESS.

    Please google — “glen beck quotes” or “crazy glen beck quotes” and tell me, why anyone should listen to such an uneducated, fuzzy-thinking, random-thought-spewing individual.

  9. franklin411 says:

    @cognos
    Yes, but according to the teabaggers, the ability to think and speak in complete sentences marks one as un-American.

  10. cognos says:

    dblwyo — Hmm… but that doesnt make sense. The changes in GDP certainly are NOT in (% of annual). GDP growth rate change by >100%% annually (range of +6% to -6%). Unemployment rate can go up or down regularly by 25% annually.

    Unemployment just went down by 0.3% or -3% in the last reading. Larger than he acknowledges in the highest case of sales. Its only close if he means (monthly % change, in the annual rate) but then he should’ve put the “sales %” numbers in monthly (0, .1%, .2%, .3%, etc).

    Looking back through past cycles… Unemployment rate has a regular %-change range of about +/-10% change per Q. And +/-25% per year. Given the exceptional nature of this downturn, a recovery might push the upper boundary of that range.

  11. scharfy says:

    @flipspiceland

    Yes, we need a new economic metric.

    Or we could take all the unemployed and send them to Bed Bath & Beyond for a shopping spree. The resulting pop in GDP from retail sales, according to the above chart would propel us into untold prosperity – in GDP terms that is.

    The nominal soaps and lotions per capita numbers would be gaudy.

    However, if i read the chart properly, it appears we need to really get our platinum cards warmed up if we wanna spend our way out of this hole.

  12. dblwyo says:

    Cognos – those are roughly the magnitudes I’m familiar with. Still struggling though with how to explain it any clearer. Don’t know how much time you spend looking at YoY numbers but let me share my quarterly outlook: Dealing With the New Normal: Economic Situation, Market Outlook and Business Performance
    About p.10 you’ll see Sales and Sales vs. GDP vs. Consumption, which’ll speak to the first questions as well (there’s a bunch of other stuff that might tell you how weak this recovery is going to be. (and hopefully HTML escapes work – otherwise copy and paste).

    The table lists the regression equations and the “raw” data I start with is the YoY change in the real quarterly data (Unemployment by the way can swing 60 or 70% – stunning). So the table says if you get a 2.0% change in YoY real sales Unemployment still goes up by 3.3%. At 4% growth it drops -2.4%; bear in mind, again, that that’s the Unemployment RATE! -.024 X 10% ~ 2%. So Unemployment would tend to drop to 9.8%. You’d need many … many quarters of 4% growth to get back to where you want to be.

  13. philipat says:

    @franklin411 Says:

    @cognos
    Yes, but according to the teabaggers, the ability to think and speak in complete sentences marks one as un-American.

    LOL. But according to Fox, the post popular TV “news” in the US (??!!!) he is “Fair and balanced”. God help us.

  14. OT:

    from MarketWatch, of all places (?)

    http://www.marketwatch.com/story/how-to-invest-for-the-debt-bomb-explosion-2010-02-09?pagenumber=1

    “…This is a war to control 299 million American taxpayers. A war waged by the “Happy Conspiracy” Jack Bogle profiled in his 2004 “Battle for the Soul of Capitalism,” a war machine of Fat Cat Bankers, CEOs, 42,000 mercenary lobbyists and a Congress held hostage to unlimited campaign donations. Their conspiracy has been waging this war against Americans for decades, long before the Supreme Court exposed their dirty secret.

    Yes, your enemy is that “Happy Conspiracy:” It has degraded into a pseudo-capitalism with no conscience, no sense of the public good, hell-bent on controlling America’s mind, your money and the global markets for its own selfish ends. And eventually it will trigger the game-changing global-debt bomb, the third global meltdown of the century that finally ignites the Great Depression II, plunging us into an era of anarchy.

    Investors keep asking: “If it is coming, how do I invest? Buy gold? Commodities? Hedge? Short trading? TIPS? Hoard cash? Buy and hold? Lazy Portfolios?” What if the Dow sinks below 5,000? Maybe the worst-case scenario recently predicted by Bob Prechter: A deeper plunge to the 1,000 range? Imagine a global depression, a bear market dragging on for decades: “How do I protect my family? Can I ever retire? What do I invest in? How can anyone prepare?”

    How America’s two classes are preparing for a descent into anarchy
    As America descends into anarchy your family’s survival and your ability to retire will depend on which of America’s two economic classes you belong to out of our total of roughly 300 million citizens:

    “Average Joe & Jane” Americans: You’re one of 299 million Main Street Americans. Average income is $50,000, only 10% of the average bonuses paid to Wall Street’s Fat-Cat Bankers. Or you’re already one of America’s 20% underemployed … maybe on food stamps … maybe among the 47 million with no medical insurance … your retirement assets are about $50,000, a year’s survival. And you are “mad-as-hell” you’re not working “inside” the “Happy Conspiracy.”

    “Happy Conspiracy” Insiders: You’re one of the lucky million or so elite Insiders in the “Happy Conspiracy.” You may work for a Fat-Cat Bank that American taxpayers bailed out last year so you pocketed a 2009 bonus gift of somewhere between $600,000 and $10 million. Maybe you’re a Corporate American CEO. Maybe you’re on the Forbes 400 list. Or you’re a U.S. Senator…”
    ~~
    to the post:

    Sales? hmm, that were Revenues come from, no? Little wonder they’re an important metric..

  15. deadonarrival says:

    @BR

    You, ESPECIALLY YOU can’t tell me you’re going to found an argument such as this based on a DECADE LONG sampling of retail sales data…

    Especially considering that the DECADE in question was one of historically low interest rates, inflated asset values (that were largely used to LEVER consumption), cheap goods, low taxes, secure entitlements, general perceived economic prosperity, & growth hope…

    Also, despite the “apparent” trough, rebound, and false trajectory of ’09, much of the PRESENT data relies on the following things:

    - The fact that much of the “consumption” numbers now are simply based on the fact that many businesses have SHUT DOWN COMPLETELY… The “SURVIVORS” are still only seeing marginal operational advantages… The NET DIFFERENT is actually negative.
    - Much of this was “stimulus driven” (what happens when the punch bowl is eventually removed?)
    - What happens when the “fortuitous positive cycle” of stimulus morphs into the “anchor spiral” of withdrawn stimulus.
    - What happens as the dollar strengthens? Thereby creating headwinds to profit margins of US “producers” (which were a tailwind all throughout ’10)? The “layoffs” that follow? The expired purchasing power (on the margin)?… The END of extended unemployment benefits? Higher taxes?

    I certainly hope you posted this thread so that SOMEONE would respond as I have done…

    I certainly hope you don’t SINCERELY BELIEVE Dave’s “cheat sheet” means anything…

    I REALLY REALLY EXTRA DOUBLE DOG hope that Fusion is not “long equities” based on the “cheat sheet” of Dave Livingston of Llinlithgow Associates…

    CV

  16. deadonarrival says:

    @MEH (7:49)

    x2

    Good post…

  17. cognos says:

    DBLWYO — So, you contradict yourself in you own post:

    1 – “Unemployment by the way can swing 60 or 70% – stunning”
    2 – “At 4% growth it drops -2.4%; bear in mind, again, that that’s the Unemployment RATE! -.024 X 10% ~ 2%. So Unemployment would tend to drop to 9.8%”

    If we KNOW a typical (again, TYPICAL) yearly change in unemployment can be +/-25%… then why would a LARGE quarterly change be -2.5%?

    Makes zero sense.

    ANSWER — he just did the regression estimatation from 2001 to 2009. This is significantly negatively biases the formula and just makes some non-sensical stats. Its classic G-I-G-O (garbage-in garbage-out).

  18. TakBak04 says:

    @Flipspiceland says:

    flipspiceland Says:
    February 15th, 2010 at 3:13 pm

    Doesn’t GDP stand for Gross Domestic ‘Product’?

    If so, what relevance does GDP have in an economy that is only 15% manufacturing and 85% services?

    Measuring the value of services has been a bugaboo in economics since it first became evident that we can’t grow by taking in each other’s laundry. How much value does an estate lawyer render when he gets 5% of the estate for filing a few papers? Or the physician who can’t diagnose and treat an illness but still gets the same fee? Or the H & R Block tax preparer who adds nothing to the economy but the transfer of the client’s cash to his own checking account? Taken as a whole, services are likely worth 10% of what producing an Ipod or a machine that extracts coal in a long-wall mining operation does.

    The sleight of hand that has been going on for 60 years by the government hiding the majority of its liabilities off the balance sheet and devaluing the dollar makes any GDP number look ridiculous to be significant of anything.

    ——————

    I guess one could say that the 5% to Estate Lawyers pays for the paralegals to go out to lunch and the Lawyer to invest in Real Estate and Lunch..and the Physician pays his staff (who also buy lunch, feed families and take vacations at Disney World) and the Physician invests in Roth IRA’s and Real Estate. And, H&R Block hires folks who “eat lunch, take vacations at the Lake and the Managers Invest and Buy Real Estate, Boats and New Cars.

    I would put more worry on the Traders and M&A folks at the Investment Houses who trade stocks back and forth…hurting long-term value investors and Merge and Aquire companies just to bleed them dry and then sell off the dired husk to some other lesser investor before it’s split again after millions of jobs have been lost to make the companies appear more investor worthy on balance sheet when it’s all “smoke & mirrors.”

    Just saying. And often time I agree with your views…but this time I think you are hitting the wrong people. BTW I have a blood sucking lawyer that I’m involved in with a family matter over a death in my family. But, as much as I know he’s bleeding me…his paralegal just had a baby and the utility company and the local luncheon places there are getting a cut, too. I have to hold my breath to find a good thing to say about the guy…but the Big Picture is…that it does help the GDP whereas the Goldman Stuff and Trading Desks just seem to get such a big bang for their buck that their buying a “hot dog” on Wall St. for Lunch with the common man but having 14,000 sq.ft. homes in Greenwich, CT and pads and villas all over the world while they fling some coins on the street to “hot dog man” and “big bucks to NYC Exclusive Restaurants and Global buyers for their Million Dollar Wine Stash…kind of seems disproportionate.

    If you get my drift. Proportionality….. Compare the little guy supporting local people with the Big Guy supporting more “little people” but providing no value along the way for growth. Well…if you think about it. Who reacts more in the community compared to spreading the wealth? You might think the Goldman/Morgan and Hedgies…but proportionately…divided up…. I’m not so sure which is worse.

  19. deadonarrival says:

    @BR

    Just following up my (8:03)…

    I mean, for a metaphorical reference… CV happens to be working on his BRACKETOLOGY (for the NCAA Basketball Championships – “March Madness”) right now…

    If you want, I have MARQUETTE, St. MARYS, & OKLAHOMA STATE as “on the bubble” teams (teams that are still trying to get into the dance – but need some good play and good luck)…

    But if you want… I could GO TO WORK and write you a TREATISE (condensed into a CHEAT SHEET) on why these three teams have a legitimate chance to win the whole damn enchilada!

    Bracket Busters?
    As in “having a legitimate shot”?

    or Bracket BUSTERS?
    As in URBAN SLANG/EBONICS (“Buster” = Another word for “punks”, “scaredy cats”, or “chickens”

  20. cognos says:

    TakBak04 –

    You are exactly wrong. Making “stuff” is very low value. Intellectual work is very high-value. This is often in services: healthcare, design/engineering, financial services, media, technology. This is the core of our GDP and our wealth. This pays for other high-value internal services: police, courts, restaurants, luxury/leisure, retail, etc.

    Have you noticed the US the wealthiest country on earth… by a very long way?
    Have you noticed the USD is not really “devalued” at all! Where would you get such a silly idea? Inflation is at its lowest levels ever.

    Facts. You cant have your own.

    You might want to meet some immigrants. I know dozens of Chinese, Mexicans, Indoesians, Russians, French, New Zealanders… there are all here in the US. I know the PhD types and the illegals doing labor. They are not here because its an “awful place” with “no opportunity”. Quite the opposite. They know — its a better life.

  21. OscarWildeDog says:

    Gee, another model/system/algorithm that purports future outcomes based on quant history. Taken to it’s logical extension…no, let’s not go there.

  22. call me ahab says:

    takbak-

    I have to side w/ flippy boy-

    because what you are saying is a transfer of wealth-

    no real wealth is being created

  23. TakBak04 says:

    @ahab

    I have to side w/ flippy boy-

    because what you are saying is a transfer of wealth-

    no real wealth is being created

    Answer:

    I’m saying does what Hedge Funds and Investment Bank Traders plus the M&A folks (who bleed companies dry before they sell them off again) contribute as much proportionally to GDP when they spread their wealth as the Doctor, Lawyer or H&R Block Accountant? Do those who make more money contribute more to GDP than those who service them?

    ????

  24. call me ahab says:

    takbak-

    of course-

    but it is ALL not real wealth creation-

    a dieing empire’s last throes of viability come from slopping around the wealth that was made before

  25. alfred e says:

    @deadonarrival: How’s the snow treating you?

  26. mathman says:

    Taken to its natural conclusion:

    http://questioneverything.typepad.com/

  27. cognos says:

    TakBak04 –

    Does the venture capitalist contribute to GDP?

    (For those who do not understand modern finance well… the investment banker and hedge fund manager are links in the chain similar to the venture capitalist. The VC is easier for most people to understand. But in a world flush with capital, channeling that capital to the right ideas, entrprenuers, and building new companies OR properly valuing and rewarding existing companies, providing equity and debt capital, and combining businesses through M&A… these are extremely high value.

    Do you see it? VCs do a pretty important job, right?

  28. TakBak04 says:

    cognos Says:

    Do you see it? VCs do a pretty important job, right?

    ————————–

    ANSWER: You might find this an interesting watch concerning VC and Monopolism that exists in the US today which actually destroys small business entreprenuers and consolidates wealth and production into very few large companies.

    “Cornered: The New Monopoly Capitalism and the Economics of Destruction” Barry Lynn (Published: January 2010)

    http://www.youtube.com/watch?v=tOxZb2H8c0I&feature=play

    Regular Harpers and Financial Times contributor Barry C. Lynn paints a genuinely alarming picture: most of our public debates about globalization, competitiveness, creative destruction, and risky finance are nothing more than a cover for the widespread consolidation of power in nearly every imaginable sector of the American economy.

    Cornered strips the camouflage from the secret world of twenty-first-century monopolies-neofeudalist empires whose sheer size, vast resources, and immense political power enable them to control virtually every major industry in America in an increasingly authoritarian manner. He reveals how these massive juggernauts, which would have been illegal just thirty years ago, came into being, how they have destroyed or devoured their competition, and how they collude with one another to maintain their power and create the illusion of open, competitive markets.

    The Obama administration has promised more aggressive enforcement on antitrust issues, but Lynn argues that they are missing the forest for the trees. For decades, the federal government has encouraged companies to buy one another up, outsource all their production, and make their profits by leveraging their market share. It will take more than a lawsuit or two to overthrow Americas corporatist oligarchy and restore a model of capitalism that protects our rights as property holders and citizens.

    * Includes stories of real people and real industries that show how monopolies threaten independent businesses, squelch innovation, degrade the quality and safety of products, destabilize vital industrial and financial systems, and destroy the fabric of democracy
    * Avoids the partisan cant that has poisoned virtually every important American debate in recent years
    * Demonstrates how the drive for always lower prices makes your job disappear, puts your small business out of business, and turns dreams of entrepreneurial success into impossible fantasies

    Lynn is one of the vital new voices of his generation, and his work has been compared already to John Kenneth Galbraith and Peter Drucker. The Washington Post called Lynn’s last book — on globalization — Tom Friedman for grownups. Cornered is essential reading for anyone who cares about America and its future.