Consumers may be able to predict the economic outlook more accurately than experts who are paid to be informed.
This means that businesses can best gauge economic trends based on their customers’ buying patterns.
“When the economy slows, generally speaking, the most expensive rooms in a hotel, the suites, tend to sell about the same, as do the more expensive rooms,” says Mark Flaherty, general manager of The Inn Above Tide in Sausalito, “but there’s a little change in the least expensive rooms.”
There’s a widespread belief among the 33-room hotel and other North Bay businesses that those with money will continue to spend during a downturn, while those with less will cut back on discretionary spending and save money.
According to S&P Global Market Intelligence, 346 companies have filed for bankruptcy or reorganization in the first half of this year, highlighting the uncertain economic situation for some businesses. Red Lobster is among the companies that have filed for bankruptcy. In July, Big Lots announced it would close all of its North Bay stores.
Lipstick Index
The “lipstick index” has been seen as a barometer of the economy, but experts have downplayed the concept, which was invented by the heir to the Estee Lauder fortune in 2001 after the dot-com bubble collapsed the previous year.
“At the time, sales of lipstick and makeup soared as GDP slowed. The idea here is that as the economy enters a recession, consumers may cut back on spending, especially on larger, more expensive durable goods and housing, but still spend on smaller non-essential or luxury items like lipstick. Because consumers are facing more stressful economic times, they might pamper themselves with small luxuries,” said Florence Bouvet, an economics professor at Sonoma State University.
While this theory made sense 23 years ago, it’s not foolproof: Bouvet points out that no one bought lipstick during the pandemic recession because they were wearing masks.
“During the Great Recession of 2007-2009, lipstick sales fell but nail polish sales grew,” Bouvet said. “So overall, I’m skeptical that lipstick sales can really predict recessions, even if it makes sense for consumers to pamper themselves with little luxuries when they can’t afford the big ones. Recently, higher than normal inflation rates in 2021-2022 may have also boosted lipstick sales, because a 10% increase in the price of a $30 lipstick is easier to buy than a house.”
She’s not the only one who questions the relevance of the lipstick index.
“I personally don’t see much value in this concept because there is limited empirical research that provides solid evidence to support it,” said Yiye Chang, an accounting professor at Dominican University in San Rafael.
Bouvet added, “Recently, a senior associate at JP Morgan Wealth Management noted that LVMH’s fragrances and cosmetics profits increased 3% in the first quarter of 2024, a much lower growth rate than the 11% increase in the same period in 2023. If, as some predict, a recession is expected in the US later this year, cosmetics sales/profits are expected to increase as GDP slows.”
Companies have a say
Sonoma’s Donham Estates isn’t worried about how many bottles of wine it’s currently selling: The boutique winery has a way of measuring spending habits.
“A large portion of our customer base is made up of upper-income earners who don’t follow the same norms as traditional consumers,” CEO Angelica de Vere Mabrey said in an email. “We expect to see early cycle behaviors such as buying in bulk to lock in pre-inflation prices, relying more on credit cards rather than debit cards or cash for personal liquidity, and a focus on buying vintage or high-scoring wines that will appreciate over time. These will be the ‘canaries in the coal mine’ and ‘lipstick index’ indicators to pay particular attention to in Donham.”
De Vere Mabray is aware of what’s going on in the economy and what its members are buying, and knows that if the economy worsens, Donham will ultimately be affected.
“Notable indicators of a mid-to-late recession peak would include declining wine club memberships, fewer bottles per order, a general decline in trade towards less expensive club/bottle options, and cyclical purchase frequency of premium SKUs,” she said.
In other words, sales of premium bottles remained steady, but then there was a surge in purchases following the announcement of a high score, followed by a drop in purchases before sales leveled off again.
