Why does everybody seem to care so much about retail sales? Why does the stock market seem to fall off a cliff when we get negative retail numbers?

The answer: The Commerce Department’s Retail Sales Report provides investors, economists and politicians with an advanced look at how the economy and individual companies are doing right now and where they might be headed in the future.

Of course, you don’t want to read news like the Retails Sales news in a vacuum, but the announcement can tell you quite a bit.

[VIDEO] Why Investors Care About Retail Sales

Retail Sales and the Economy

The Retail Sales report is an important leading indicator because it gives us a glimpse into what the upcoming quarterly Gross Domestic Product (GDP) number—a number that tells us how fast the economy is growing or shrinking—might look like. You see, consumers make up approximately 70 percent of the United State’s GDP.

So if consumers are out there spending their money, we know that the GDP will probably show that the economy is growing. On the other hand, if consumers aren’t out there spending their money, we know that the GDP will probably show the economy is slowing, or even shrinking.

Retail Sales and Unemployment

The Retail Sales report also gives us a glimpse into what the future unemployment picture might look like. Unemployment tends to rise when the economy slows down or shrinks, and it tends to decline when the economy is strong and growing.

Once we get an idea of how the economy is going to be doing by looking at how retail sales might affect GDP, we can then look and see how our projected GDP numbers are going to affect unemployment.

Retail Sales and Company Profits

The Retail Sales report can give us a crucial glimpse into how individual retailers will most likely perform in the future. When retail sales are up, you know that earnings and profits at retailers like Walmart (NYSE: WMT), Home Depot (NYSE: HD) and Macy’s (NYSE: M) are going to be growing.

Conversely, when retail sales are down, you know that earnings and profits at most retailers are going to be down. However, Walmart does seem to be one retailer that is able to buck that trend—thanks to its position as a discount retailer that thrives during difficult economic times.

Image courtesy Klearchos Kapoutsis.