Retail Reacceleration: Leading Industry Indicators Suggest Turnaround

Retail industry forecasts that include external economic factors (i.e., leading indicators) are more accurate in signaling future growth, contraction and major shifts in consumer momentum than traditional forecasts that only take historical performance into account. By monitoring these factors and noting changes, retail executives will have better insight with which to make planning decisions.

While obvious data like employment and hourly wages demonstrate consumers’ immediate ability and likelihood to purchase, hidden factors like architectural billings and small business optimism are often overlooked, despite being proven indicators of the health of the overall retail industry.

Retail Industry Indicators to Watch
To help retailers of all sizes make more accurate predictions, as well as better operational, marketing and inventory decisions, here are four key factors to watch, along with insight on the current status of these indicators:

• The Residential Architectural Billings Index is a nine-month leading indicator of retail sales. This factor measures activities in residential construction, which reached its most recent low point in late 2015 and has been steadily rising since. When the residential construction market improves, consumer spending typically picks up. Improving home values make consumers feel more confident in their financial status and more comfortable spending extra to fill up their new homes.
• Small business optimism is a five-month leading indicator of retail sales. This factor is strongly correlated with wage growth, as confident businesses tend to hire more, pay more and provide raises — ultimately giving consumers more spending power. Small business optimism reached its cyclical low in the first quarter of 2016, and has been steadily rising since, indicating future positive momentum in the retail trade.
• Consumer sentiment is a nine-month leading indicator of retail sales. This factor measures consumer confidence, which directly impacts consumers’ likelihood to spend. On a year-over-year basis, consumer sentiment reached its low point in this year's second quarter, and isn't growing just yet. However, this trend is heading in the right direction. Retailers should especially pay attention to consumer sentiment as fears from the BREXIT vote and the slowdown in China dissipate to reveal the true sentiment of U.S. consumers, which will tell us if re-acceleration will return in the coming months.
• The ISM Non-Manufacturing New Orders Index is a five-month leading indicator of retail sales. This factor represents the nonindustrial side of the economy, such as arts and entertainment, educational services, real estate utilities, transportation, and more. The ISM Non-Manufacturing New Orders Index reached its cyclical low recently, but should be expected to recover to a positive shift in momentum later this year — particularly in the retail industry.

In looking at the most recent economic statistics, leading indicators of the retail industry tell us that the consumer will remain a pillar of strength keeping the U.S. economy afloat late this year. While we may see some continued deceleration over the next couple of months, a turnaround can be expected to develop late this year and into 2017. Therefore, retail executives should remain optimistic and plan for continued growth in the months to come.

Danielle Marceau is a senior economist for Prevedere, a predictive analytics company specializing in business performance forecasting.