Firstly, what is the rate of change? The rate of change (ROC) is the percentage change in value that a variable changes over a defined period of time. ROC is often used when attempting to understand the trajectory or trend in which a certain variable is moving in.
Take a look at this chart (below), showing the rate of change on a month-over-month basis of U.S. Retail Sales as of January 2017:
By itself, without an understanding of the rate of change it is difficult to interpret this graph to extract any estimate of whether the data presented is positive or negative. For instance, the last bar in the chart for the month of January says 0.4%. Is that good or bad? The answer is compared to what?
How Do You Find The Rate Of Change?
While with this particular chart it is clear that sales are up over the year, its not a clear indication of trend.
Here is an additional chart that shows the rate of change on a year over year basis in retail sales:
This chart provides a much clearer picture of trend which suggests that retail sales have been in a positive trajectory with many positive monthly returns. But, how positive? Again, is this chart a good depiction of the real picture or is it misleading if you just simply look at the numbers?
Here is retail sales for the past 10 years looking at the rate of change from one year to the next:
From the chart previously shown, all the data is positive. But, looking at this chart, and comparing the data over a far greater period of time you can see that there is a general uptrend and the retail sales are gaining momentum only recently, after they stalled out since 2010. This means that since 2010 have experienced rather slow year over year growth.
The math on this is simple: Look at retail sales total for one year’s release and get a percentage increase/decrease from the previous year’s total. In the month-over-month charts, you are comparing the previous month’s release to this month. But, as the first retail sales chart shows, although the tone is generally positive you do not get a big, broad picture.
Which Chart Is Most Helpful?
It is critical to first examine your time frame for investment. Those with a time horizon of 10 years should evaluate different factors than those that have a time frame of 1 month.
Mainstream media however mostly however focuses on the short-term changes, as that is what attracts the most views (we are guessing). This could be misleading despite whatever headlines or soundbites you may hear. Just because the last month of sales may have been great does not mean that will be the case for next month. Nothing moves in a straight line up, down, backward or forward.
Examine All Data
Even then you shouldn’t rest on the laurels of what a chart of several given time horizons suggests to you. U.S. retail sales are moving higher. Is that good or bad? Just because you are looking at one chart that points upward does not mean you have the most complete picture. Instead, you need to confirm that not only is there improvement in retail sales but that it is moving in conjunction to other economic variables.
For instance, retail sales generally shows that consumers are buying products (or not) on the retail level. If they are purchasing something, how does that affect the rest of the economy? In this instance, if consumers are buying things, prices tend to move higher as that is a signal of increased demand, as a comparison of retail sales and the rate of change for the consumer price index indicates:
Paramount to studying economic data is determining the effects of this data on various areas of the economy. In this case, as we can see from years and years worth of data releases, as consumers purchase more and more items, prices tend to move higher. Likewise, during economic declines prices will decline as well.
The economy experiences a business cycle which is often a great measurement to go by to determine where you are within an economic trend – closer to the beginning or the end. Always evaluate all data available for all time periods. Do not limit yourself by simply examining one time frame and disregarding another. A year over year chart may suggest that you are in a downtrend, despite the past monthly retail sales suggesting otherwise.
After all, what good is a chart if you have no basis of comparison for it. In addition, evaluate the way the components that make up indicators, such as the unemployment rate, are compiled to ensure that you are not looking at a biased view of the world.