In finance we're taught that when the economic situation tightens, discretionary spending goes down. But that’s not entirely true. Let's look at the Lipstick Index.
As the warning bells of a recession in the U.S. grow louder, we constantly hear about a wide range of indicators, from inverse bond yields to housing prices. But a more counterintuitive index has been making some noise lately and it’s called the Lipstick Index.
The principle behind this index is simple: as consumers tighten their discretionary spending, they still want to make themselves look and feel nice. But with high priced items like designer clothes off the list, people turn to cheaper goods like makeup in order to treat themselves. And up go the sales. Another term for these products is ‘affordable luxuries’.
The Lipstick Index is a relatively new indicator, first coined by Leonard Lauder in 2001 when the U.S. economy was reeling from both terrorist attacks and a tough economy (read more in The Wrap: Bear Market Winners). Leonard noticed lipstick sales had jumped 11% year-on-year, and that the phenomenon had also occurred between 1929 and 1933, the Great Depression.
Like all economic indicators, the Lipstick Index is plenty fallible. During the worst parts of the COVID-19 crash, it failed to deliver. But that can be attributed to the need to wear masks, since fragrance sales skyrocketed 45% year-on-year in 2020.
Right now, the Lipstick Index is flashing again. In Q2 2022, lip product revenue in the U.S. rose by 28%.
Does this mean the U.S. is headed for a recession? Not necessarily. There’s no single indicator that guarantees a recession is coming. Investors need to look at the whole economic package. The Lipstick Index is just an interesting place to start.