An Economic Indicator is Born

This past Friday, there was a great deal made of the fact that for the first time ever, the number of customers visiting Starbucks declined. This had a very negative effect on Starbucks' stock (SBUX) and, more interestingly, the entire stock market reacted negatively to this news. Why would Starbucks' stock drag down the entire stock market?

The answer to this lies in assessing the overall strength of the US economy. Starbucks coffee is more expensive than its primary competitors nationally, Dunkin Donuts and McDonalds (it recently made a dramatic upgrade in the quality of its coffee). And, coffee at Starbucks is more expensive than both of these competitors. Furthermore, an important input for retailers selling prepared coffee is milk (and cream), the price of which has risen sharply of late, hurting its profitability.

So, the interpretation of the Starbucks situation Friday was that: (1) it is yet another company being hurt by rising costs; and (2) the deterioration in discretionary income resulting from higher food and energy prices has now spread to Starbucks, signalling the broadening of overall demand weakness. Thus, a new economic indicator was born on Friday: STARBUCKS AS AN INDICATOR OF DISCRETIONARY SPENDING.

How accurate is Starbucks as an indicator of discretionary spending and hence as a leading economic indicator? Has it been a very good indicator for quite a while and we didn't realize this until last Friday? For extra credit (due at the beginning of class tomorrow, 11/19), graph Starbucks stock price (SBUX) as a line graph in the same graph as consumer discretionary stocks (XLY). To do this, below the main graph under Indicators select Price. Enter the symbol XLY . Under POSITION, select BEHIND PRICE. Then make this a line as well. Add any annotations you think will illustrate your beliefs about the relationship between these two variables. Those annotations will serve as your discussion. Copy this graph and paste it into a Word document and bring it to class Monday.

Here is the link for an article written about Friday's events. Read it and critique it (you should begin doing this routinely).