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- iHaveNet.com: Economy
by Danielle Kurtzleben
Sometimes the skirts at the mall or the price of a Big Mac can say a lot about the economy's health
The unemployment rate can be measured any number of different ways. The Dow is volatile. GDP seems to constantly be revised downward. Every major economic indicator comes with its own unique set of complexities and caveats. But as it turns out, some of the simplest ways to measure the economy can be found at the nearest Bloomingdale's or fast food restaurant down the street. Here are a list of the unorthodox ways to track where the economy is and where it's going.
Big Mac Index
In this index, The Economist uses the ubiquitous Big Mac to compare exchange rates. As Big Macs around the world are more or less the same, differing prices in different countries for the burger showthe gap in how different currencies are valued. As The Economist reported in January, the price of a Big Mac in Switzerland - $6.81 - shows the Swiss franc to be the most overvalued currency the magazine studies. Meanwhile, India's Maharaja Mac (made with chicken instead of beef in the predominately Hindu country), priced at $1.62, suggests that the Indian rupee is undervalued. While it would be unrealistic to expect prices and exchange rates to perfectly track together, economic theory holds that a country's prices for a basket of goods and services should predict exchange rates over the long run.
Leonard Lauder, chairman emeritus of cosmetics company Estee Lauder, coined the term "lipstick index" in 2001, explaining why his company sold so much lipstick during the early-2000s recession. Since then, the concept has been expanded to nail polish and foundation. However, the basic idea remains the same -- when finances are tight, consumers will forego large luxury purchases for smaller indulgences, like cosmetics.
However, the connection across cosmetics is blurry. According to the most recent data from market research firm Mintel, lip makeup sales were down in 2010 but projected to recover slightly in 2011. However, sales of other facial cosmetics grew in 2010 and were projected to grow further in 2011.
Instead, cosmetic sales can reveal other trends in spending, like tradeoffs between more expensive brands and cheaper alternatives. The most recent Estee Lauder sales report showed a bump in sales, suggesting that upper-crust consumers might be rebounding to pre-recession spending levels. Meanwhile, Mintel's recent data suggests that many other women have "traded down" to less expensive brands.
Consider it the converse of makeup indices. If cosmetics are the small luxuries of tough times, men's underwear is the opposite: a basic necessity whose purchase can be pushed into the future until more disposable funds are available. Former Fed Chairman Alan Greenspan famously espoused the theory, positing that a downtick in underwear sales can foreshadow an economic downturn. If the idea holds water, then the U.S. economy may be firmly on the upswing. The Associated Press reported last week that men's undergarment sales were up more than 7 percent in 2011.
The Hemline Index is one of the best-known alternative measures of economic performance. Theorized in 1926 by economist George Taylor, the theory behind this indicator is that women's hemlines tend to follow the stock market. Skirts tend to get shorter during boom times, while ankle-length hemlines signify a bear market. Glamour recently referenced the indicator, speculating that the uneven hemlines currently in vogue reflect the volatile Dow Jones average.
In a 2010 paper, two economists from the Erasmus School of Economics in the Netherlands showed that the skirt-stock correlation exists, albeit with a three-year lag time. Therefore, they predicted that the recent recession would mean long skirts "around 2011 and 2012." Maybe that explains the recent -- if early -- rage for floor-length maxi dresses in summer 2010 and 2011.
Cardboard Box Shipments
The idea behind this one is simple: many goods ship in corrugated cardboard boxes, so when box companies are producing more, it's a good economic sign. According to data from the Federal Reserve, production of "paperboard containers" -- which includes corrugated cardboard boxes -- grew in the second half of 2011 but is down from 2007, pre-recession.
Waffle House Index
Unlike the other indicators on this list, the so-called "Waffle House Index" has less nuance to it. Rather, it's more of a binary signal after a catastrophic event, like a hurricane or tornado. The chain of restaurants is notorious for operating even after disasters. As the Wall Street Journal reported after Hurricane Irene moved up the East Coast in 2011, FEMA Administrator Craig Fugate sees Waffle Houses as a sign of how hard-hit a community might be. "If you get there and the Waffle House is closed? That's really bad. That's where you go to work," he has said.
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Six Unusual Economic Indicators