It is no
secret that GDP data is a lagging economic indicator. For example, we are
already approaching the end of the third quarter, but the latest update we have
received is a revised estimate of second-quarter growth, which has risen from
3.0% to 3.3%. This shows why relying solely on GDP data is not very useful.
That is
why analysts often resort to alternative, sometimes unconventional measures.
One of the most famous is the so-called “lipstick index.” The idea is that
during recessions, women reduce their spending on expensive beauty products and
clothing and opt for small, affordable luxuries such as lipstick, nail polish,
or perfume.
The
problem is that the lipstick index may be losing relevance, as shoppers
increasingly seek value for money in the face of an overload of choices. The
same skepticism applies to theories
such as skirt length (shorter skirts supposedly mean a
stronger economy) or nail length (longer nails indicate prosperity).
Some
suggest predicting recessions and declines
in the S&P 500 or Dow Jones by
observing demand for hairdressing services, as customers supposedly choose
cheaper treatments. Others point to young people making cappuccinos at home
instead of going to coffee shops, or to increased applications to law schools.
More
meaningful indicators are available, such as trends in sales and cardboard
production. The logic is simple: if box manufacturers reduce production, this
may indicate lower demand in the future. When companies expect growth, they
order more boxes; orders dry up quickly when they anticipate a slowdown in
sales.
Another one is the “trash
index,” which tracks waste volumes as an indicator of economic activity.
Generally, more waste
means more production and consumption. Since it reflects activity in real time,
it can highlight changes before official data does. However, its reliability is
limited by factors such as increased recycling rates and the digitization of
consumption. Thus, it should be used with other indicators.
For
example, the Baltic Dry Index (BDI) which measures shipping costs for raw
materials like coal, iron ore, and grain across global routes. A rising BDI
points to growing demand for raw materials, often signaling expansion, while a
falling BDI suggests weaker demand and a potential slowdown (for now, it’s
sitting at its yearly highs).
Similarly,
the truck
tonnage index provides a basic snapshot of the U.S. economy. Since
trucks transport approximately 70% of all domestic goods, any increase in this
index suggests real growth in manufacturing, retail activity, and construction.
If goods aren’t moving, neither is the economy.
This article was written by IL Contributors at investinglive.com.