Learn what are retail sales and the Purchasing Managers Index (PMI)

At the beginning of each month there are reports on changes in individual sectors, e.g. Services PMI, Manufacturing PMI. When telling you what the individual sectors are, the question arises what PMI is? Retail sales also appear in reports, but why is it so important for a given economy?

 

Retail Sales

Retail sales are a key macroeconomic indicator that tracks consumer demand for finished goods. Shows total sales, percentage change, and year-over-year sales change. Retail sales data is reported by all grocery and retail stores. They are divided into several different categories including (but not limited to):

 

• Shops with clothing and clothing accessories

• Pharmacies and drugstores

• Grocery stores and drinks

• Electronics and household appliances stores

• Furniture stores

• Gas stations

• New car dealers

 

Seasonality affects retail sales. The fourth quarter - the months October to December - tends to have the highest level of sales, partly due to the holiday shopping season. The most seasonal retail sectors include electronics, sporting goods, e-commerce and apparel. Higher inflation causes the prices of most goods and services to rise sharply. As a result, consumers tend to limit overall spending or prioritize needs and choose inflation-proof purchases.

 

The exact measure of retail sales is extremely important in assessing the economic condition. This is due to the fact that consumer spending or personal consumption expenditures constitute a significant part of GDP. 

 

Moreover, the Retail Sales Report helps analysts and investors to gauge the health of the economy and any possible inflation pressures. Higher sales are good news for retail shareholders as it means higher returns. Similar to GDP, this indicator is often broken out into various industries so more detailed analysis can provide information on the economy.

 

Check out how the retail sales looks like on an example: Inflation In Eurozone Higher Than Forecast | Retail Sales Reports| FXMAG.COM

 

The Purchasing Managers' Index (PMI)

According to the Dictionary of Economics, the purchasing managers index (PMI) is a measure of the prevailing direction of economic trends in manufacturing. The PMI is based on a monthly survey of supply chain managers across 19 industries, covering both upstream and downstream activity.

 

Speaking otherwise, it is a measure of economic activity based on how many of purchases in individual industries, claims that there has been an increase in activity in the last month.

 

The main advantage of the PMI is the forward indicator as it is published on the first day of the month after the survey was conducted. This helps to provide a more updated picture of the economic situation than the quarterly indices. The disadvantage is that PMI indices focus only on a given sector, which may not give a complete picture. While PMIs have their limitations as economic indicators, they are likely to continue to be closely watched. 

 

Leading PMI is a number from 0 to 100. A PMI above 50 indicates an increase compared to the previous month. A PMI reading below 50 indicates a contraction and a reading of 50 indicates no change. The further from 50, the greater the level of change. The PMI index is calculated as:

 

PMI = (P1 * 1) + (P2 * 0.5) + (P3 * 0)

Where:

P1 = percentage of responses reporting improvement

P2 = percentage of responses reporting no change

P3 = percentage of responses reporting worsening

 

It is also considered a good indicator of economic activity. Economists consider output growth as measured by the PMI to be a good indicator of industrial production, for which official statistics are released later. Many countries' central banks also use the index to make decisions about interest rates.

 

The PMI index also points to corporate profits. Growth in the enterprise affects the attractiveness of the company on the market. The decline is analogous to the growth. As a result, it is closely watched by both investors and bond markets.

 

In sum, the PMI seems to be a good, although not perfect, indicator of a country's current economic condition.

 

This index was presented on a practical example: Forecasts To Decrease. Russia PMI index has already fallen| FXMAG.COM

 

Source: The Dictionary of Economics