Big Mac, Lipstick, and Men’s Underwear: What They Can Tell Us About the Market

To say that economics is only about numbers would be an oversimplification. Rather, economics studies human behavior, decision-making processes, and emotions. Economic indicators like GDP, inflation, and unemployment rates provide crucial data but are lagging indicators that can only hint at what has already happened without explaining why.

During economic turbulence, certain sectors show increased sales that reveal patterns that more conventional metrics might overlook. These trends have prompted economists to develop indicators that could be more leading, and remarkably more prescient, than the traditional metrics. This article will present five of the most renowned non-traditional economic indicators and illustrate how savvy observers can leverage them.

The most valuable of all capital is that invested in human beings.
― Alfred Marshall, Principles of Economics

1. The Big Mac Index

Comparing the costs of common goods, like a frequent fast-food order, can provide insights into the valuations of different currencies. In 1986, The Economist developed The Big Mac Index, an informal economic indicator for comparing the purchasing power parity (PPP) of different countries. This measure highlights discrepancies in the exchange rate and price of a basket of goods across countries, with a higher index value indicating that a currency is overvalued relative to the US dollar. It is predicated on the idea that a Big Mac is always a Big Mac, allowing for slight local differences in ingredients.

The Big Mac Index as of January 2024
Source: Statista

Though the editors of The Economist emphasize that the Big Mac Index shouldn’t be taken too seriously, it has nonetheless become a global benchmark for price comparison.

Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible.
― The Economist

The Big Mac Index offers valuable insights but it also has some limitations. For instance, local salary levels, rental costs, taxes, and regulations can all affect the price of a Big Mac. Moreover, the prevalence of hamburger chains in certain countries may result in lower prices, not to mention the size and composition of the Big Mac, which adds another layer of complexity to direct comparisons. Consequently, The Economist provides additional insight by supplementing the raw index with GDP-adjusted charts.

The latest data from Statista suggests that Switzerland has one of the most expensive Big Macs at USD 8.17, indicating that the Swiss franc is potentially the most overvalued currency compared to the US dollar. However, data from The Economist on the latest GDP-adjusted Big Mac index suggests that the Uruguayan peso is the most overvalued currency, with a current differential of approximately 50.8%.

As global markets become more interconnected, the Big Mac Index can complement primary analysis for forecasting currency movements. Despite the variety of factors (mentioned above) that can affect the index, it remains useful for identifying overvalued or undervalued currencies, allowing investors to adjust their strategies accordingly. The index also helps measure and compare consumer inflation to the exchange rate, especially in countries with unreliable or unavailable official data.

2. The Lipstick Index

The Lipstick Index is the name of the unproven theory that during economic downturns, people tend to forego expensive luxury items like jewelry and handbags in favor of smaller, relatively modest goods. The underlying psychology is based on the concept of comfort consumption–the idea that people still work to boost their well-being even when their finances are constrained.

This pattern was documented by Leonard Lauder, chairman of Estée Lauder. During the 2001 recession, Lauder observed that Estée Lauder was experiencing increased lipstick sales. He determined that as the economy deteriorated, lipstick sales increased, and he coined the term “The Lipstick Index” to describe this phenomenon.

However, in recent years, the Lipstick Index has expanded beyond cosmetics to include other small luxury items such as fancy chocolates, coffee, and skincare products. The theory isn’t that economic strife makes people worry about their lip care, but rather illustrates a broader range of consumer behaviors aimed at finding affordable joys during economic downturns.

The moisturizing index has replaced the lipstick index, but the concept of the index remains the same.
― Fabrizio Freda, Estee Lauder’s Chief Executive Officer

Investors can use the Lipstick Index as a forward-looking indicator of how the economy may fare. For instance, they may focus on companies that produce affordable luxury goods that might perform better during economic downturns.

However, investors should also be aware of trendy small luxury items made popular by influencers, for example, Rhode by Hailey Bieber, Rare Beauty by Selena Gomez, or SKKN by Kim Kardashian. Without taking these factors into account, this index may not accurately represent the overall economy and could be less relevant for investors.

3. The Skyscraper Index

The Skyscraper Index, introduced by economist Andrew Lawrence in 1999, suggests a correlation between the funding of the world’s tallest buildings and subsequent economic downturns. The concept is that the funding of record-breaking skyscrapers coincides with the peak of economic cycles, indicating increased potential for recessions.

Initially, the index predicted that the funding of the tallest buildings marked the zenith of economic booms. The rationale was that skyscraper construction, a significant investment, peaked when the economy had expanded to unsustainable levels, making an economic downturn more likely.

Contrary to this initial interpretation, Lawrence later suggested that skyscraper projects could be seen as predictors of economic booms rather than crises, highlighting the complex interplay between economic cycles and monumental architectural achievements.

The completion of the world’s tallest buildings and periods of recessions
Source: The Economist

Despite its intriguing premise, the Skyscraper Index has shown mixed results in empirical studies. For instance, research from Rutgers University suggests that while the construction of exceptionally tall buildings may coincide with periods of rapid economic growth, it does not reliably predict recessions.

Additionally, statistical analyses have indicated that GDP can be a predictor of building height, but the reverse is not necessarily true. In other words, while prosperous economic conditions can lead to the construction of taller buildings, their construction does not consistently forecast economic declines. This interpretation reinforces the ambiguous empirical support for the index.

Currently, The Burj Khalifa (828m), completed in 2010, is the tallest building in the world. The Jeddah Tower received its initial funding in 2012 and is planned to be 180m taller. To date, no other buildings planned to be taller have been fully funded.

4. The Hemline Index

Another fascinating yet unconventional economic indicator is the Hemline Index. This concept, often attributed to economist George Taylor in the 1920s, is based on a conjectured correlation between the stock market index performance and the length of skirts: in a downturn, skirts are supposed to get longer, heels shorter, and fashion as a whole more discreet and quieter.

That is, in economic prosperity, women have the time and money to acquire stockings and worry about hair removal, therefore, they are more likely to wear shorter skirts and dresses. The Hemline Index emerged with the economic impact of the Roaring Twenties when women began to wear short skirts to show off that they had enough purchasing power to be able to afford such indulgences as hosiery or regular depilation.

According to this pattern, long skirts were more in demand during recessions, so women could save on care products. Although this runs counter to the aforementioned Lipstick Index, such bursts of fashion changes were seen during the Great Depression as well as the 2008 crisis.

The comparison of the Hemline Index and events that affected the economy from 1900 to 2005
Source: LinkedIn

Despite its popularity in the 20th century, the Hemline Index may be less relevant in the near future. With the rise of fast fashion, trends now change not annually, as they used to, but every season. However, a more significant indicator of change may be the increasing popularity of pants among women, reflecting shifts in women’s attitudes toward clothing.

5. The Men’s Underwear Index

The last but not the least surprising indicator of economic recession on our list is the Men’s Underwear Index. This index is based on the assumption that sales of men’s underwear are stable because men view underwear as a mere necessity. However, during periods of financial uncertainty, even this basic purchase may be postponed, leading to a noticeable decline in sales. As the economic situation improves, they rebound again.

It may seem like a joke, but Alan Greenspan, former head of the US Federal Reserve, once said that he looks at the men’s underwear index as an indicator of the overall state of the economy.

If you look at the sales of male underpants, it’s just been much a flat line, hardly ever changes. But on those few occasions where it dips, that means that men are so pinched that they are deciding not to replace underpants.
― NPR correspondent Robert Krulwich after a talk with Alan Greenspan, 2008

In recent years, the Men’s Underwear Index continues to provide insights into economic sentiment. For instance, the index held during the Great Recession, when men’s underwear sales decreased in 2008 and 2009 but recovered in 2010.

Men’s underwear retail sales from 2005 to 2015
Source: Business Review at Berkeley

During the COVID-19 pandemic, the initial economic uncertainty was mirrored in a drop in men’s underwear sales, consistent with the index’s predictions. As the economy began to recover, sales picked up, indicating a return to consumer confidence.

Though it may seem odd, men’s underwear sales can offer valuable economic insights for investors, including the possibility of recession.

What Do These Indicators Tell Us?

Economic trends are influenced by psychology. The behavior of the masses is a clear indicator of the state of the world’s economy, but their measurement requires a more unconventional, and more predictive, approach than GDPs or unemployment rates. The indices reviewed in this article focus on a number of different aspects of people’s consumption habits, but they can all provide us with a broader picture of past and current economic performance.