The “Lipstick Index” Makes A Triumphant Return - Does This Foreshadow A Recession?
Can something as mundane as a tube of lipstick tell you about the direction of the entire US economy?
Perhaps.
It is certainly something to think about and possibly pay attention to in the new year. We are on very uncertain ground in terms of answering the "what next?" question and the "Lipstick Index" might help us take one possibility seriously.
One day the markets think a hard recession is incoming, on the next that a "soft landing" might still be possible.
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A bit lost alongside the CPI print and the Federal Reserve meeting, the other important economic data point that was published this past week was US Retail Sales.
This data reveals how much Americans spent in "retail therapy" across the country that literally invented the "shop till you drop" mantra.
Unfortunately, the data came in very weak.
Retail sales for November declined -0.6%, even worse than the expected -0.3% drop.
The mighty American shopper disappointed retailers and did so during the most vital period of the year. The stretch that literally makes or breaks many stores, brands and businesses.
There are sort of two points to say here:
As the CPI data made clear and our newsletter has previously argued, people are moving away from spending on goods and towards services so this is to be expected.
But the weaker data also supports the idea that all the interest rate increases (as well as the knock on effects such as layoffs) are finally having an impact on the real economy.
The interest rate changes by the Federal Reserve in Washington -> impact Wall Street's financial conditions in New York and eventually -> arrive on Main Street, USA.
Regardless of how you weigh these two possibilities, it is clear that these two trends are combining to bring the slowing US economy into focus all around the country. The butterfly effect of a man talking on TV about the economy is finally becoming real for regular people.
There is one notable bright spot and though it is interesting, it should also cause the avid Pebble newsletter reader to pause:
Sales of lipstick are holding up very well.
In fact, overall beauty sales are holding up very well. Sephora, Target's Ulta Beauty, L'Oreal and beyond, company after company that sell makeup are reporting that this particular sector of their business (or section the department store or online mall etc.) is holding up rather well.
What is going on here? How can this possibly matter?
It has been noticed for some time that, when times start to get tough, certain products seem to hold their own, economically speaking.
One category of such products are often called "consumer staples." These are items like toothpaste, diapers, laundry detergent and milk whose sales stay resilient even in an economic recession.
Another is lipstick.
The concept of a "Lipstick Index" was a term coined by Leonard Lauder, former chair of Estée Lauder.
Mr Lauder summarized his view in the quote at the top of this newsletter:
"When lipstick sales go up, people don't want to buy dresses."
And it generally holds up.
And even if that is off by an order of magnitude, it is clear that as the economy deteriorates, people are still buying lipstick.
It has a sort of bizarre and very human logic. Consumers may begin to cut back their household purchases when the budget is impacted by a new trend such as a weaker economy (or inflation!) but they still try and reserve some funds to try and still make themselves feel special during an otherwise difficult time.
This category of "affordable luxuries" isn't limited to just lipstick but that particular beauty product is its most iconic symbol.
The thing about the lipstick that differentiates it from other products in the consumer staple industry is that it is not a staple, really and its sales don't just hold up, they typically increase during an economic downturn.
Consumers should perhaps hold back from buying any luxuries, affordable or not, but humans being humans love the feeling that the lift of a little retail therapy splurge. It is hard to blame them, frankly.
Another somewhat depressing term for this tendency is "hope in a tube."
A lot of recent market commentary has focused on various (typically true) facts like the stock market has historically not bottomed until an actual recession (and especially significant labor market weakness) has occurred.
But another trend to possibly watch is falling lipstick sales (or the rise of lipstick discounts!). It may not be until women pivot back to dresses from core beauty products that we know the market could be on its way to new highs.....
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