With inflation running at record highs, investors are closely monitoring economic data, which reflects how much price increases are impacting the American consumer. Consumer spending in the US is responsible for over two-thirds of Gross Domestic Product, or GDP. This means that consumption of goods and services is an extremely important driver of economic activity — or inactivity.
Recently, the Census Bureau reported that retail sales were unchanged in July. Although there wasn’t a negative reading, this latest figure wasn’t overly encouraging either. It means that price hikes may be impacting American spending, which could increase the chances of tipping into a full-blown recession. The flat reading means that economists and investors alike are looking for more clues on American spending habits and sometimes they turn to alternative measures.
The Lipstick Index
One of the more well-known, but still offbeat, gauges for economic activity is known as the “Lipstick Index.” The theory holds that when sales of lipstick surge, the economy is actually in the doldrums. This inverse relationship was noticed by Estée Lauder (EL) heir and chairman Leonard Lauder during the 2001 recession. It also took place during the Great Depression from 1929 to 1933. In both instances, lipstick sales kept climbing despite adverse economic conditions.
The reason can be chalked up to “escapism,” or the idea that when people have less discretionary income, they still like to make small, yet meaningful purchases. Since lipstick is significantly less expensive than jewelry, apparel, and accessories, people tend to buy it even when they aren’t purchasing other non-essential goods. Interestingly enough, lip makeup revenue was up 48% in the first quarter of 2022, compared to last year.
In addition to the “Lipstick Index,” some economists look to underwear sales as a reflection of the state of the economy. During the Great Recession of 2008, Alan Greenspan, head of the Federal Reserve, told reporters that men tend to buy fewer new pairs of underpants during downturns.
At the grocery store, there are a number of other economic indicators. Sales of both frozen pizza and mac and cheese tend to perform well during times when money is tight. In 2009, Kraft (KHC) posted increased sales as consumers turned to DiGiorno and boxed macaroni.
While unemployment numbers, job openings, and data on the housing market may be more conventional measurements of the health of the US economy, when looking for hints on where the country is heading, it never hurts to pop your head into the frozen aisle.
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