There are multiple ways to predict an upcoming economic downturn. J.P. Morgan for example has made a model that combines the yield curve, Private sector debt service, economic momentum, profits and financial markets. These are also common predictors to forecast an economic recession . However, there are also unconventional indexes that can potentially predict an economic downturn. One of these indexes is the lipstick index.
The theory behind the lipstick index is that in a recession, lipstick sales tend to rise. That lipstick sales rise has to do with the decline in disposable income during these periods. A house, car, expensive clothing and other big-ticket luxury goods become unaffordable, in contrast to less expensive luxury items like lipstick. This correlation is observed by Leonard Lauder, chairman of Estée, in 2001.
One might say that it is irrational to keep spending on luxury goods in an economic bear market. But reasoning from the perspective of human behavior, then it can be explained. During these periods one can find stress. There are various ways to relieve this stress. Buying luxury goods is a method. Especially when the luxury good changes your appearance and can be used in every day life, like lipstick. This gives a psychological boost and may explain the increased sales during regressions.
That said, there is something wrong with this index. For one, it is never economically proven. It is based on an observation made during the recession of the early 2000s . The problem with this index is that it lacks reliable historical data to back it up. Plus, the sales can also be affected by the latest trend .
However, for the index to be more reliable, more affordable luxury goods can be added – as over the years similar indexes have been proposed. For example, in 2008 there was a rise in nail polish instead of lipstick. And during the COVID-19 pandemic some suggested a mascara index. This way the index might be more robust for a shift in the latest trend.
Beside beauty products, other expenses can be tracked to forecast an economic recession or bear market. Here one can think of a shift from long vacations to shorter weekend trips or other goods or services that can replace a long vacation, such as books and games. With the assumption that men spend more time at home during a bear market – sales of items like specialty coffee beans or candles.
Despite the possible correlations that these indexes reflect, it wise to take coincidence into consideration, since trends come and go. Due to this fluctuation, the rise in sales of lipstick or other goods during crisis have more to do with a change in trends rather than the irrational nature of humans that want something to buy even when they cannot afford it.
In short, during the 2001 crises, lipstick sales had risen while disposable income had declined. Later, a similar trend was visible with other goods during the crisis in 2008 and the COVID-19 pandemic. While the consumption of affordable luxury goods may suggest a potential recession, it is important to acknowledge that these trends could simply be coincidental.