In a world of complex and diverse economies we need various economic indicators to interpret current or future investment policies to judge overall health of the economy. We are all probably aware about some common economic indicators like Gross Domestic Product (GDP), Consumer Price Index (CPI) etc. but what we don’t know is about some unusual economic indicators, that might also help in predicting future.
Through the course of this article I am going to present some of the most unique economic indicators and discuss how they work, also debating the notion that whether they are effective or not.
It was proposed by Leonard Lauder, chairman of Estée Lauder after the 9/11 attacks in 2001.
Leading lipstick indicator is an economic indicator that suggests that an increase in sales of small luxuries such as lipsticks can indicate an oncoming recession or a period of diminished consumer confidence. It was believed that during the time of recession, women tend to invest in small luxuries like lipsticks, forgoing other expensive purchases. It was accepted during 2001 as it seems to be the only plausible explanation for increase in sales of lipstick even when overall consumer spending was dropping.
This economic indicator hasn’t held up during the current pandemic-induced recession. Makeup sales have tanked up to 30% globally this year, according to a May report from McKinsey & Company and lipstick in particular has suffered; according to the same report, Amazon sales of lip care and color dropped 15% from the year prior in the four weeks ending in April 11, the biggest drop of any category.
In 2009, Kline and Company, a market research company, analysed lipstick sales from 1989 onwards and found that the figure increased even during times of prosperity.
Even In 2009, the year after the start of the Great Recession, lipstick sales declined by nearly 10%, according to Fortune instead of rising as the index might have predicted. In fact, it is proposed to use nail polish instead of lipstick as a new indicator.
We can conclude by saying that lipstick index has FAILED in the present scenario.
The Big Mac Index
Most of you must have tried a famous Big Mac at McDonald’s at least once in your lives. However, very few of you might only know that it gave rise to the so-called Big Mac Index, which is used to compare the value of currencies of different countries. This is one of the most common indicators used by investors.
The Big Mac Index also known as Burgonomics was created by the Economic Magazine in 1986. It is used to measure purchasing power parity between nations.
Burgonomics was never intended as a precise gauge of currency misalignment, but, it was merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and has become the subject of dozens of academic studies.
Purchasing-power parity implies that exchange rates are determined by the value of goods that currencies can buy and it signals where exchange rates should be heading in the long run and for this purpose what can act better than a McDonald’s Big Mac. McDonald’s is not a just ordinary fast food chain it is spread over in 120 countries with 37,855 restaurants and a Big Mac is always a Big Mac everywhere allowing for slight local differences in ingredients. Differences in local prices – in our case, for Big Macs – can suggest what the exchange rate should be
Now coming to how is it calculated?
It is calculated by dividing the price of a Big Mac in one country by the price of a Big Mac in another country in their respective local currencies to arrive at an exchange rate. This exchange rate is then compared to the official exchange rate between the two currencies to determine if either currency is undervalued or overvalued according to the PPP theory or price of the burger in various countries are converted to one currency (such as the US dollar) and used to measure purchasing power parity.
It does have some limitations such as
It doesn’t take into account the differences in Big Macs themselves from one nation to another. It doesn’t track the cultural forces surrounding McDonald’s. It ignores the fact that McDonald’s sets the price of a Big Mac, leading to instability in the Index but still it is better than other substitutes like kfc or Starbucks index. Overall, most of the economists consider it pretty accurate and relevant.
Diaper rash indicator
This is although an informal indicator but is actually effective. It works on a simple principle that to cut costs in a weakening economy, parents might change babies’ diaper fewer times leading to more rashes and thus increased sales in rash cream. This is not a major indicator but can work as a supporting indicator. It has proved to be 82% accurate for 2001-12 for US economy and as for India, latest 2020 data by Statista shows revenue growth by diaper sales has come down from 6% in 2019 to 1.9% in 2020.
Hence, we can conclude that this indicator is accurate.
All these economic indicators might not be most relevant but the amount of accuracy some of these posses is amazing and in times like this when it’s difficult to rely on few major indicators they can be of great use to investors.