Whenever you hear the term ‘recession’ or an ‘economic slump’, some of the key terms that pop into your head might be GDP growth rate, yield curve, confidence index, employment data, consumer spending, etc. which are the key indicators of a recession. But apart from the news being aired about the economic slowdown and its key indicators, we have some other indicators too which show some correlation with economic growth. However, these are some unorthodox indicators and aren’t used officially in the projection of an economic downturn. Nevertheless, these indicators have some implications as some patterns have been observed in the past which make them somewhat unusual but significant for us.
1. Men’s underwear index(MUI)-
Have you ever wondered that your consumption trends and habits for underpants can be used to observe economic slowdown? Though this may sound unconventional to you, but keeping in mind the past performance of the economy and its relation with MUI, it holds a great significance. This index has been corroborated by former FED chairman Alan Greenspan in the 1970s. According to this theory, the sales of men’s underwear can be used as an economic indicator. The broad assumption behind this concept is that ‘underpants’ are treated as a necessary commodity rather than a luxury item which would imply that the purchasing habits will remain unchanged even when the economy is going through a slowdown. 2009 Data of US shows that it witnessed a sharp decline in sales when the economy was sluggish. There was a decline of 2.3% in sales of underwear which rose as the economy recovered. It was also detected that after the 2008 financial crisis, the sales grew by $1.1 billon between 2009-2015.
It is really difficult to detect the expenditure on underwear by guys in the pandemic but if we treat it as discretionary spending, Fitch ratings estimated that discretionary spending is going to decline 40-50% in the first half of 2020.
2. First date indicator-
As the economy is bottomed out, people have gloomy days. They look out for dates to either avoid loneliness or they try to buck up the gloominess.
Match.com noticed trends on its site that corresponded to an economic slowdown. The fourth quarter of 2008 which was the recession period observed the busiest period in seven years. When Dow Jones industrial index dropped to five years low in November 2008, the site experienced the second-highest traffic.
3. Lipstick effect-
This theory was proposed by Leonard Lauder, the chairman of Estee lauder company, in 2011 after he witnessed an uptick in lipstick sales after the 2011 attacks. The lipstick index shows that people are willing to save as much as they can in times of adversity and end up buying inexpensive luxury items. Women rather than spending $400 on a bag would get cheered up by cheaper items like lipstick. This rise in the sale of small luxury items like lipstick may indicate a loss of public confidence or a period of recession.
The US witnessed an 11% rise in lipstick sales during the 2001 downfall. However, its sales dropped by 3% during the 2008 crisis and the lipstick theory didn’t hold true.
It’s losing significance nowadays as cosmetic products are being treated as non-essentials in pandemic and women aren’t likely to care about these products during this crisis where normal activities have been shuttered.
4. Garbage indicator-
Edward Humes’s book Garbology highlights the idea that trash can reveal a wealth of information about a society showing a positive correlation between America’s economy and accelerating accumulation of wealth. This index is based on the fact that as you consume more and more, you are going to throw something out which generates more trash. To back up this argument, the trash index had an 82.4 per cent statistical correlation with the economic growth of the US since 2001.
The chart from economist Michael Mc Donough shows how the US GDP changed with the change in carloads of trash being shipped off by rails.
The slowdown in trash collection in 2008 projected the country’s weakening economy before any stock market indicator.
Again, this indicator isn’t much authentic as it did follow the trends from 2014-16 but trash volume slipped a bit in 2017 while there was rapid economic growth.
5. R-word index-
‘The Economist’ propounded this concept. It counts the number of stories that used the term ‘recession’ in a quarter being published in The Washington Post and The New York Times. In Q3 of 1990, the R count doubled to 750 and it was observed that there was a small contraction. Tracking the R-word count, The Economist was able to project the beginning of recessions in 1990, 2001, and 2007.
Despite this, the R-word index isn’t a reliable indicator of oncoming recession as writing about a recession can’t cause a slowdown but getting featured in numerous articles during a particular period affects market sentiments and people are likely to lose confidence.
It has also been seen that it caused a fear of a recession in 1998. Moreover, the boost in R-word count occurred when the US economy officially faced recession. Consequently, it’s advised not to consider it as the best indicator.
In 2020, there have been numerous articles revolving around recession and economic slowdown.
6. Champagne index-
Many economists had made a connection between the fizzy spirit and economic growth. Karl Storchmann, a New York University professor contrived that champagne is a consistent indicator of economic growth. With the reduction in purchasing power, the sales of champagne also face a downfall. The fact that shipments of the US reached 23.1 million bottles in 2006 and declined to 12.5 mn bottles when the recession hit in 2009 buttresses the argument. The proposition is that “champagne is not something to give away. When people are low in spirits, they don’t feel like drinking champagne in the gloom.”
The wine index was also considered a predictor of a strong economy. But it declined by more than 22 % between 2001 and 2012 while Dow Jones increased by 6 percent. Thus, it doesn’t always match the economics of the stock market.
In addition to this, Europe also faced a beer recession from 2008-10 along with the debt crisis.
There are more economic indicators that are unconventional but do reveal important facts that were used to analyze their effects on economic growth. The impacts might not be as accurate as our official data because these indicators proved to be fallacious in some instances. Therefore, these aren’t the best leading indicators of economic growth and recession as these are based upon some assumptions and also include the behavioural aspect of human beings, how they react and respond to the economy in stagnation in different period of times. Furthermore, the general trends can be varied in some rare circumstances as seen in the COVID 19 pandemic.
Did you find any of these indicators affecting your lifestyle and consumption patterns in the times of the current crisis? How did your behaviour change in response to the sullen days in the past few months? Were you more prone to buying items like lipsticks, underwear, and champagne? Did you come across the R-word oftentimes?
Do let us know about your responsiveness and your views in the comments section below.