Retail Sales, Industrial Production and Durable Goods: Nominal versus Real, the Control Group and Volatile Categories

What you will learn

• Why retail sales are nominal and how to estimate real sales.
• What the US control group is, how to compute it and why it feeds GDP.
• How industrial production and capacity utilisation work and how the German releases differ.
• How to read durable goods orders through the transport noise.

Explanation

Retail sales are nominal. The US Census Bureau's advance retail sales report, about two weeks after month-end, measures sales in current dollars. If petrol prices jump 5 percent, petrol-station sales rise even if nobody bought more fuel. To estimate real (volume) growth, divide nominal growth by the relevant price change. Destatis publishes German retail sales (Einzelhandelsumsatz) in nominal and real terms about one month after the reference month, and Eurostat aggregates euro-area volumes. Check whether a headline is nominal or real before comparing countries.

The control group. The report shows total sales, sales excluding autos and petrol, and the control group, which excludes motor vehicles and parts, petrol stations, building materials and food services. These exclusions remove the most volatile or price-driven categories and those the national accounts treat differently (restaurants are services, building materials feed investment). The control group maps most directly into goods consumption in GDP, which is why nowcasts quote it. Strong total sales with a weak control group usually means car dealers or petrol prices did the work; the advance report is revised over the following two months.

Industrial production and capacity utilisation. The Federal Reserve's industrial production (IP) index, published mid-month, measures real output in manufacturing, mining and utilities. Manufacturing is about three quarters of the index and the line to read, because utilities swing with the weather and mining with oil prices. Capacity utilisation is output divided by estimated sustainable capacity; readings well above the long-run average signal constraints and price pressure, readings well below signal slack. Destatis publishes German production (Produktion im Produzierenden Gewerbe) about five to six weeks after month-end and manufacturing orders (Auftragseingang) a day earlier; both are noisy and heavily revised, so German commentators quote three-month comparisons. Because industry is a larger share of the German economy, these releases matter more for German GDP tracking.

Durable goods. The Census Bureau's durable goods report, about four weeks after month-end, covers orders, shipments and inventories of goods designed to last three years or more. The headline is dominated by transport equipment, where a single airline order can swing the total by 10 percent in a month. Read it in layers: total orders, orders excluding transportation, and core capital goods orders (non-defence capital goods excluding aircraft), the cleanest monthly proxy for business equipment investment. Core capital goods shipments feed the GDP investment estimate.

Rules of thumb. Control group before headline; manufacturing IP before total IP; core capital goods before total durable goods. Check nominal versus real, use three-month trends for noisy series, and check the revision to the previous month, which is often larger than the current surprise.

Worked example

Hypothetical example, part 1: control group. Total retail sales last month were $720.0 billion: motor vehicles and parts $140.0 billion, petrol stations $55.0 billion, building materials $42.0 billion, food services $95.0 billion. Control group = 720.0 − 140.0 − 55.0 − 42.0 − 95.0 = $388.0 billion, about 54 percent of the total.

This month: control group +0.5 percent, autos −2.0 percent, petrol +3.0 percent (a price effect), building materials flat, food services +0.4 percent. New total: 389.94 + 137.20 + 56.65 + 42.00 + 95.38 = $721.17 billion, a headline rise of only 0.16 percent. The headline looks soft, but the control group rose a healthy 0.5 percent; the weakness is car sales. If goods prices rose 0.3 percent, real control-group growth is about 0.2 percent.

Part 2: durable goods. Orders last month were $300.0 billion, of which transport $95.0 billion. Transport orders fall 10 percent as a previous aircraft order fails to repeat, while orders excluding transport rise 0.4 percent. New total: 95.0 × 0.90 + 205.0 × 1.004 = 85.50 + 205.82 = $291.32 billion, a headline fall of 2.9 percent. The headline tells you about one aircraft order; the ex-transport line tells you about the economy.

Common mistake

Practice activity

On paper: total retail sales last month 600 billion: autos 120, petrol 50, building materials 35, food services 80. This month autos +3.0 percent, petrol −6.0 percent, building materials +1.0 percent, food services flat, control group −0.3 percent. (a) Compute the control group. (b) Compute the new total and headline change. (c) What does it mean for GDP tracking?

Key takeaways

• US retail sales are nominal; deflate them, or read the real series Destatis and Eurostat publish.
• Control group = total minus autos, petrol, building materials and food services; it is the line that feeds GDP.
• Read manufacturing IP and capacity utilisation rather than total IP; German production and orders data are noisy.
• In durable goods, aircraft orders drive the headline; core capital goods orders and shipments show business investment.

Next step

Next we move from hard data to soft data: consumer sentiment and expectations surveys from Michigan, the Conference Board and GfK, and why inflation expectations matter to central banks.