Lipstick Index: Unusual Recession Indicators

When the economy takes a turn for the worse, economists and analysts typically look to the broad-based indicators such as GDP growth, unemployment rate, or inflation. But outside of these traditional indicators, there is an interesting area of unconventional indicators—quirky but often surprisingly useful—in predicting or responding to an economic downturn. One of these unique indicators is the “Lipstick Index,” as one of the more interesting measures of consumer sentiment. Let’s take a look at what it is, why it matters, and what other quirky indicators can help us interpret the economic space. 

What is the Lipstick Index?

The term Lipstick Index was developed by Estée Lauder’s former chairman Leonard Lauder during the recession of the early 2000s. The core idea with the Lipstick Index is that consumers during a recession will forego larger indulgences, such as handbags, vacations, or electronics, but will still look for smaller indulgences, such as a $20 lipstick. According to this concept, sales of lipsticks will increase in a recession because people are still inclined to indulge in some luxury or self-care, and the $20 lipstick is a much easier price point to hit! 

Although the Lipstick Index is more anecdotal than scientific, it has generated enough discussion in the past couple of decades to develop into a pop culture concept in economics.

The Lipstick Index was actually validated in a slight increase in lipstick sales during the 2001 recession, but later recessions like the recession in 2008 were not as systematic. So as an indicator, it seems to reflect consumer psychology at a certain point—but it is inherently not a perfect indicator.

Other Odd Indicators of Recession

The Lipstick Index is just the start. There have been bizarre indicators of the economy for some time, with some unusual yet, at times unexpected and effective, reflections of consumer choice or consumer well-being.

1. The Men’s Underwear Index

Another potentially ridiculous economic indicator, one popularized by former Federal Reserve Chair Alan Greenspan, is the Men’s Underwear Index. It was based on the assumption that men see underwear as a necessity and, while every man does not want to leave home without skivvies, do not see a need to replace underwear that is getting older and older. If it is a recessionary period, men may delay buying new underwear and sales may drop. Yet, as the economy improves, associated men’s underwear sales typically increase.

This indicator might look absurd at surface level, but I find it compelling. It taps into private, habitual spending decisions that might start indicating less confidence to future purchases before even the earliest data sets in. 

2. The Hemline Index

Who would have thought that fashion trends would be independent from economic trends? In fact, Economists George Taylor proposed the Hemline Index back in the 1920’s.

The theory states that skirt lengths will rise during economic growth and fall during economic decline. One example is flapper dresses that were in style during the booming 1920s, followed by longer skirts during the Great Depression.

There are those who criticize this theory, stating it’s more of a social reflection than an economic indicator. However, it does get attention sometimes during market and fashion transitions.

3. The Big Mac Index

The Big Mac Index, created by The Economist, is a humorous and entertaining indication of purchasing power parity (PPP) between countries. Its geared to compare the price of a Big Mac in numerous countries to see whether their currencies are over- or undervalued.

It is not a recession indicator per se, but does speak to currency strength, wealth, and economics in comparison to its global peers. It still can be used as part of an overall investment strategy and global economic view.

4. High Heel and Nail Polish Sales

Like the Lipstick Index, the High Heel Index indicates in times of trouble high heel sales rise since women typically dress sharper in effort to be shown with more competitive clothing. Alternatively, nail polish has been indicated in the last few years as a trend similar to the Nail Polish Index. The rise in nail polish sales when other discretionary spending was down – the same reasoning of affordable pleasure makes sense.

5. Google Trends and Search Activity

As we discussed earlier, the way we search online in this day and age is useful in pointing to economic behavior. For example, searches around “unemployment benefits,” “debt relief” and “how to budget” can rise sharply in periods of economic insecurity. Economists and researchers have begun using Google Trends data as a form of real-time data to see general trends alongside of traditional lagging indicators.

For example, in the early stages of the COVID-19 pandemic searches for “how to file for unemployment” surged, long before any data was released around unemployment rates.

Are these indicators useful?

Untraditional indicators such as the Lipstick Index are rarely to be used as sole pieces of economic analysis. Rather they often provide insight into consumer psychology and behaviour collected over longer periods of time during periods of uncertainty. They often provide narrative context and signal and in some cases warning signs well ahead of any traditional statistics. That said, atypical signals are also necessary to approach with some caution. For example.

Social changes such as the move towards gender-neutral and unisex beauty products, or more relaxed approaches to fashion have the potential to distort trends like lipstick or hemline sales. 

It is possible for major external shocks, such as a pandemic, to change behaviour entirely- for example while nail polish sales rose during the COVID, lipstick sales fell during the COVID-19 pandemic, most likely due in part to the wearing of masks, even though disposable income was up as evidenced by government support.

And some behaviors (like not buying underwear) are probably more about personal finance than they are macroeconomics.

Bottom line: These indicators are fun, fascinating, and sometimes can be useful; but they should be thought of in conjunction with something more tangible like employment levels, industrial production, and spending data.

In Context: Why These Indicators Are Important

What makes these unusual economic indicators intriguing is that they capture how people feel, not just what people do. Traditional economic indicators are important, but they often lag in real-time how people feel about the economy. A sudden uptick in nail polish sales or a decline in men’s underwear sales can still reveal something deeper about people’s confidence, level of comfort and group levels of stress.

In some respect, these non-traditional signals are less predictive about GDP, and more reflective of the pulse of the consumer.

Conclusion

Recessions are complicated, complex events, impacted by everything from worldwide supply chains, interest rates, and geopolitical shocks. While economists will analyze the cold hard data way into the future, there will always be space in the indicators toolbox for loving and charming indicators like the Lipstick Index.

At the very least, these indicators remind us that economics is not just about numbers, but about people. And, in some cases, people sometimes say a lot about the economy with their purchases (or lack of purchases) of things like lipsticks, lattes, and lingerie.

So, if you are scrolling past a display of personal care products or leaving the store without those fancy socks you were eyeing, just remember—you may be giving an economic sign without even realizing that you are doing it!