The Java Index?

As economists look for clues on the direction of consumer spending, they may want to look into how much Americans are willing to spend on their coffee.

Consumers have been more willing to spend since the lows of the recession, but recent declines in retail sales and confidence have sparked worries over whether spending can continue to grow in the second half of the year.

Enter the coffee indicator. A “tell-tale sign of how consumers feel about employment, income and the future is where they buy their coffee and whether they step up for the more expensive concoction,” wrote Majestic Research economist Steve Blitz in a recent research note.

Majestic Research tracks anonymous credit-card data, and can see how much consumers spend by category and store. Blitz broke out the average dollar transactions at Starbucks and Dunkin’ Donuts. The data show that during the worst of the recession consumers spent less at the two coffee outlets, but as the employment picture started to improve people were willing to spend more per transaction.

The trend reversed at the beginning of April when transaction size turned down. To be sure, much of that change is likely seasonal. Transaction size at Starbucks, especially, takes a big spike around the holidays as shoppers buy coffee baskets and mugs for those caffeine addicts on their lists. In the last two years, it has bounced back a bit through the late winter, turning down in April and then moving back up in the late summer/early fall.

So far, this year’s transactions at Starbucks and Dunkin’ Donuts is following the pattern. If that bounce back materializes in the late summer, it could indicate that consumers are still willing to open their wallets. But if the average transaction size levels off or continues to decline, it could indicate a more thrifty consumer will dominate the second half of this year.

Source: Phil Izzo, WSJ Blog, Real Time Economics