Odd Economic Indicators (Plus: a word on spurious correlations)

As a concept, the economy is abstract. For example, even though the GDP influences overall conditions, it has such a dispersed effect most people don’t monitor it particularly closely.

Over the years, people of varying levels of expertise have devised more relatable (if not always reliable) economic bellwethers.

Before we go any further, a BIG caveat:

These examples are purely for entertainment value.

The fact two variables move a certain direction does not imply a causal link between them, nor does it mean they will continue to move those directions in the future.

Please do not make financial decisions based around hamburgers, lipstick, or neckties.

Our goal with this post is twofold:

1. To amuse
2. To make readers aware of movements between variables which may seem convincing at first glance, but are not truly meaningful

Spurious Correlations

A spurious correlation refers to a relationship between two variables that appears significant but is in reality coincidental. If you look closely enough, you can find correlations just about anywhere. This does not necessarily mean the two observations influence each other or are necessarily related.

To illustrate our point:

The following chart plots the relationship between Tesla’s stock price and Google searches for Rick Astley’s 1987 cult classic “Never Gonna Give You Up.” As you can see, the two are quite highly correlated… but this does not mean one causes the other. If it did, people would be using internet bots to pump up Google searches for the song (along with TSLA).

Now that we have our statistics lesson out of the way, let’s look at some of the oddball indicators proposed over the years.

The Lipstick Index

Credited to Leonard Lauder of the Estee Lauder cosmetics empire, the Lipstick Index was born during the 2001 recession. Lauder noticed something odd in consumer behavior: despite the reeling economy, lipstick sales rose rather than declined.

The theory goes: during economic downturns, demand for small, affordable luxuries increases. Therefore, Lauder reasoned, the strength of the economy and cosmetics sales are inversely related. People may not be able to afford a vacation, but they can splurge on some lipstick or cologne without breaking the bank. Besides, looking (or smelling) good can translate into feeling good, and who doesn’t need a pick me up every now and then?

The Necktie Index

In a very tongue-in-cheek article, the Financial Times observed an interesting phenomenon: before the Recession, world leaders were experimenting with their wardrobe, eschewing the confinements of the necktie in favor of a more breezy, button down and blazer look. A year later, suddenly politicians were sporting them again. In fact, necktie sales boomed in the UK to 21.4 million units in 2007.

Why the change? Well, there’s something sober about a necktie, and for world leaders trying to project a trustworthy, stable image to an uneasy public, dressing the part is part of the job. As to the booming sales among the general public, the Recession brought with it a wave of layoffs. Displaced job seekers brushed up their wardrobes and buttoned down their shirts as they sought new employment. Thus, the Necktie Index theory was born: economic downturns correlate with increased necktie sales. Whether the observation holds in future business cycles remains to be seen, especially as fashion changes and work-from-home remains commonplace.

The Big Mac Index

Image Source: The Economist

Created by The Economist in 1986, the Big Mac Index measures Purchasing Power Parity (PPP) between countries using the price of a Big Mac as the benchmark. According to the economic theory behind Purchasing Power Parity, exchange rates should converge over time for an identical “basket of goods.” Here, the “basket of goods” is a Big Mac.

To translate from Economist to English, the index helps visualize whether currencies are undervalued or overvalued by dividing the price of a Big Mac in Country A by the price in Country B, and illustrates differences in the cost of living. For more on “baskets of goods” and how economics measures price changes, check out our blog post on the CPI vs PCE inflation measures, or the difference between inflation and the price level.

Of course, the Big Mac Index has plenty of limitations. First off, it requires any two countries being compared to both have Big Macs! It was never intended as a serious economic measure, but it does make the concept of Purchasing Power Parity and exchange rate theory far more accessible than their long-winded formal definitions.

Conclusion

In the world of economics, where abstract concepts like business cycles, GDP, and exchange rates can seem distant and complex, some creative minds have made observations which make fluctuations more tangible. While these quirky measures may not be entirely reliable, they offer a glimpse into the whimsical ways people relate everyday life to the economy.

Fortunately, you do not have to rely on neckties or lipstick sales to navigate financial markets -- and we would really, REALLY prefer you didn’t. If you have any questions about the markets or the state of the economy, we are always happy to talk. Please don’t hesitate to reach out.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Tomblin Diego Porter Investment Group of Raymond James, and not necessarily those of Raymond James.

Raymond James & Associates, Inc., member New York Stock Exchange/SIPC