‘Lipstick index’ no longer a reliable recession predictor

Consumers might be the better predictor of the financial outlook than experts who are paid to be in the know.

This in turn means businesses often have the best pulse of the economy based on customers’ buying patterns.

“When there is a down turn in the economy, generally speaking the most expensive rooms, the suites in the hotel, tend to sell about the same; the more expensive guest rooms do the same,” Mark Flaherty, general manager of The Inn Above Tide in Sausalito, said. “But with the least expensive rooms there is a little bit of a change.”

The sentiment among this 33-room hotel and other businesses is that those with a lot of money keep spending even when the economy sours, while those with less means tighten their belts by pulling back on discretionary expenditures.

Considering S&P Global Market Intelligence says 346 companies in the first six months of this year have either filed to liquidate or reorganize, proves that for some the economy is precarious.

The Inn Above Tide sees less expensive rooms being booked when the economy heads downhill. (Image: Kathryn Reed)

Lipstick index

While the “lipstick index” has been credited with being an economic barometer, experts are not putting much weight into this concept that was coined by an heir to the Estee Lauder fortune in 2001 following the dot.com bust the previous year.

“At the time, lipstick/cosmetics sales surged while GDP slowed down. The idea here is that when the economy enters a recession and consumers curtail their spending, especially of expensive/large durable goods and houses, they might still spend on smaller non-essential/luxury goods like lipsticks. As consumers’ face more stressful economic circumstances, they might treat themselves with small luxuries,” explained Florence Bouvet, Sonoma State University economics professor.

While the theory made sense 23 years ago, it’s not a sure bet. Bouvet points to how during the pandemic-induced recession no one was buying lipstick because they were wearing masks.

“During the Great Recession (of) 2007-09, lipstick sales fell, but nail polish sales increased,” Bouvet said. “So, overall, I am skeptical that lipstick sales can really predict recessions, even if it makes sense that consumers treat themselves with small luxury products when they cannot afford bigger ones. Recently, 2021-2022, the higher than usual inflation rates might have also bolstered sales of lipsticks as it is easier to afford a 10% increase in a $30 lipstick than on a house.”

She is not alone in questioning the relevance of the lipstick index.

“I personally don’t add too much value to the concept because there is limited empirical research that provides solid evidence of this concept,” said Yiye Zhang, accounting professor at Dominican University of California in San Rafael.

Bouvet added, “More recently, a senior associate from JP Morgan Wealth Management pointed out that during the first quarter of 2024 LVMH profits from perfumes and cosmetics rose by 3 percent, at a much slower rate than the 11 percent experienced during the same period of 2023. If a recession were to be expected later this year in the U.S., as some predict, we would expect the sales/profits of cosmetics to increase when GDP slows down.”

Donum Estate winery in Sonoma County has ways to monitor the economy. (Image: Kathryn Reed)

Businesses weigh-in

Donum Estate in Sonoma is not worried about the number of bottle of wines it is selling today. The boutique winery has ways to gauge spending habits.

“Our client base is dominated by high-earners for the most part who don’t conform to the same norms that the rank and file consumer traditionally would,” CEO Angelica de Vere-Mabray said in an email. “I’d expect to see early cycle behaviors like buying in bulk to lock in pre-inflation pricing, a heavier reliance on credit vs. debit/cash to preserve personal liquidity, and a focus on purchasing library vintage/high scoring wines that stand to gain value over time. Those would represent our ‘canary in the coalmine’ or ‘lipstick index’ indicators I’d be looking out for at Donum specifically.”

De Vere-Mabray is cognizant of what the economy is doing and what her members are buying, recognizing that if the economy shifted for the worse, Donum would eventually feel the effects.

“Standout metrics for the mid- to late cycle of a recession peak would be wine club populations dropping, bottles per order decreasing, a general trading down to cheaper club/bottle options, and a cyclical purchasing frequency for high-end SKUs,” she said.

In other words, the high-end bottles would trend flat, then a high score announcement would create a spike in buying, followed by fewer purchases before sales went flat again.

“The biggest difference between our clientele and the general public in terms of recessions is awareness. Financially savvy folks are generally more informed and start to act earlier to shore up their collective positions before the figurative hammer drops,” de Vere-Mabray said. “Luckily for us, that means we get an entirely separate set of indicators to watch for and react to, which can effectively keep us two steps ahead of the game.”

E.R. Sawyer Jewelers, which has stores in Santa Rosa and St. Helena, has been in business since 1879. This means it has weathered numerous economic cycles.

“In the day-to-day world we are not really beholden to the economy,” owner Doug Van Dyke said.

People who have a lot of money keep buying jewelry no matter what, and others see the permanence in these types of expenditures.

“The middle and entry level is still spending a significant amount of money,” Van Dyke said. “They might be reprioritizing other things because a piece of jewelry is more important; because it lasts longer than a trip or something like that.”

He said his stores boomed during the pandemic when people could not buy cars and weren’t taking vacations.

Sarah Lane, owner of women’s boutiques Shoppe Twelve and MIAH in Napa, credits the higher than expected sales this year to the number of tourists who are in town.

It’s the online shoppers who are looking for a bargain.

“I’ve noticed with online sales it’s where we get a lot of sale shoppers; where it’s a discount culture,” Lane said. She said almost every online shopper has a sale item in their cart, which is the norm for this business that has been open since 2017.

One business that has seen a leveling off of customers is Osmosis in Freestone.

Michael Stusser, owner and founder of the Sonoma County day spa, said he had seen strong year-over-year growth since being able to reopen after the March 2020 shutdown mandate.

People put self-care as a priority and no longer considered massage discretionary, Stusser said.

However, in April booking started to flatten.

“We have weathered three or four major cycles of economic downturn. It’s curious how closely our sales track the stock market,” Stusser said in mid-July. That is why he added, “There is no rational reason we would be flattening out given what is happening in the market based on how we’ve tracked it in the past.”

With that said, he points to a couple reasons why the number of treatments is leveling off: “One is uncertainty. I think another one is people are starting to get fatigued by high prices of everything. I think people are getting a little bit burned out on how much everything costs. It’s an emotional change of heart to continue to spend the way they have.”

Note: A version of this story first appeared in the North Bay Business Journal.