A Blog by Jonathan Low


Sep 10, 2020

How Covid Has Rendered Traditional Economic Indicators Useless

Covid, and the behavior it has engendered, has thrown economists and other social scientists off their game. Most traditional indicators, including the weird ones like lipstick sales, are no longer performing.

So keep an eye on some new data economists believe may be predictive this time: haircuts, big weddings, cardboard box production (think ecommerce), sales of champagne...and canned meat. JL

Jennifer Alsever reports in Medium:

The pandemic turned economic norms upside down. Nothing follows predictable lines. And the coronavirus is tied to this economy; there’s no way to separate them. We don masks at virtually all public outings — why would a woman wear lipstick when no one can see her mouth? U.S. sales of lipstick dropped 44% year over year. (All makeup sales are down globally by 30%.) Instead of airline tickets and beauty products, we’re buying e-books and backyard swimming pools.We still have 16.3 million people unemployed, but that hasn’t kept people from snapping up RVs.

For years, economists have relied on traditional economic indicators like consumer spending, wages, inflation, and the yield curve to predict an upcoming recession — and economic recovery. They’ve also plumbed all sorts of other weird economic indicators like lipstick sales. Estee Lauder coined the term “the lipstick effect” during the 2000 recession, when sales climbed following the dot-com bust. The reasoning goes that when times get tight, women will ditch big-ticket purchases and opt for small indulgences like a tube of bright lipstick.
But along came a pandemic, turning most economic norms — and many of these indicators — upside down. Now, we don masks at virtually all public outings — why would a woman wear lipstick when no one can see her mouth? U.S. sales of lipstick in March dropped 44% year over year, according to Nielsen. (In fact, all makeup sales are down globally by 30%.)
Today’s coronavirus recession is unlike anything economists have witnessed in the past. Most every other recession has been triggered by a bubble bursting — aka housing and dot-coms — rising interest rates or a supply shock (an unexpected event that leads to a sudden change in the supply of a commodity and, ultimately, pricing — think the 1973 oil embargo). Those recessions were typically followed by slowdowns in investments; companies stopped purchasing new equipment, plants, machinery, and trucks. And consumers typically cut back on their purchases, particularly big ticket items like cars, RVs, and houses.
This time, nothing follows predictable lines. And the coronavirus is directly tied to this economy; there’s no way to separate them. Some layoffs have been temporary, although the jury is still out on whether that will remain the case, as the pandemic has delivered blows to virtually every business that involves personal interactions, whether it’s the arts or entertainment, travel, retail, services, or restaurants.
We’re also spending money in surprising ways — instead of airline tickets and beauty products, we’re buying e-books and backyard swimming pools. Consumer spending actually rose 5.6% in June, after a 8.2% jump in May — the largest increase since 1959. But that spending may not last, as millions of people stand to lose their additional unemployment benefits.
We examined some of these quirky economic indicators that economists believed in for decades. We looked at how they fared in the coronavirus recession. And a few new nontraditional indicators that might signal what’s ahead — at least in a pandemic-driven economy.

Old indicator: RV Sales Index

Economists started watching RV sales after the 1981 recession, assuming that if people were uncertain about the future, they would hold off on big-ticket purchases like RVs — which can cost between $10,000 and $300,000. Drops in RV shipments to dealers have preceded all three of the most recent recessions.
We still have 16.3 million people unemployed, but that hasn’t kept people from snapping up RVs.
With the pandemic and a potential second wave of the coronavirus, uncertainty is all around. We still have 16.3 million people unemployed, but that hasn’t kept people from snapping up RVs. Dealerships are seeing record sales as people avoid air travel and seek outdoor respite from coronavirus tedium. (They’re also buying up boats.) June was the best month for RV shipments in nearly two years with an 11% year-over-year increase and a 45% increase over May, according to a new report by the RV Industry Association.
Robert Zagami, executive director of the New England RV Dealers Association, says RV dealerships have been breaking all-time sales records two and three months in a row. “I’ve never seen anything like it,” he says. “It’s insane.”

New Indicator: The New Car Discount Index

There’s a long-held belief that the faster a car salesman hands out discounts, the weaker the economy. It proved true in the last recession: car manufacturers issued more discounts during the 2008 recession, when car sales dropped 22% in both 2008 and in 2009, according to GoodCarBadCar, which tracks car sales.
Today, car sales and discounts may be a telltale sign about the future. With fewer commutes, millions more unemployed, and more classrooms going virtual, it’s hard to justify a new car purchase, because we’re simply driving less. Car sales have already dipped during this recession, with 2.8 million cars sold since March, compared to 5.9 million during that time the year prior, according to GoodCarBadCar. And yes, automakers have started pulling out the discounts: Ford, Chevy, Mitsubishi and GMC are all offering 21% to 26% off manufacturers’ suggested retail prices of key vehicles. When people start buying cars and start literally stepping on the gas, then it’s a good bet the economy might be revving up as well.

Old Indicator: The Champagne Index

Many believe that the amount of French champagne that Americans drink is a predictor for American income the following year. The idea is that if you’re feeling pretty good about life, you pop the cork and celebrate. Economists saw a direct link to this purchase in the mid-1980s when U.S. champagne shipments rose, peaking at the end of the decade when the economy was booming. But when the recession hit in 1990 and 1991, shipments tanked. The champagne indicator has been right 90% of the time.
We’re experiencing the 10% wrong part. Despite the fact that some 17.8 million people are still unemployed, we’re still drinking. American spent $108.9 million on champagne so far this year, up 17.9% year-over-year, according to Nielsen Reports. We’re also just drinking a lot in general. Sales of all alcohol are up 27% since the pandemic started, according to Nielsen.

New Indicator: The Canned Meat Index

As consumers discovered in World War II, canned meat can be an affordable protein for meals during tough times. That mindset has endured over the decades. In fact, sales of canned meat became a go-to for penny-pinching consumers during the 2008 recession.
The logic is holding true today, but for slightly different reasons. The pandemic and social distancing has slowed restaurant dining, pushing consumers to grocery stores for more meals, marking the largest increase in sales since 2011, according to the latest Consumer Price Index. With rising demand, comes rising prices. For instance, the cost of fish, poultry, meat, and eggs inched up 2% in June, and beef prices in particular rose 20.4% in the past three months, according to the index.
Enter budget meat. Canned meat sales surged 58% during the 15-week period ending June 13, according to Nielsen data. Minnesota-based Hormel Foods, which makes Spam, has benefited. The 129-year-old company reported a 22% jump in profit in the second quarter and is looking at a record year for 2020 sales.
This could go two ways. Either consumers gain a long-lasting Spam affinity, a la Hawaii, or you’ll see people switch back to juicy steak, marking a clear sign of richer times.

Old Indicator: Cardboard Box Index

Economists have kept tabs on the production of cardboard boxes ever since shipments dropped in 2008 and then plummeted the next year. The idea: The more cardboard boxes shipped, there’s a good chance of more things being made and purchased — from electronics to clothing.
Coronavirus has skewed that economic measurement. In March, shipments of boxes surged 9% but that bump was due to panic buying — people stocking their pantries — and then stay-at-home orders prompting people to buy more items online. According to a report from consulting firm McKinsey, we experienced 10 years of e-commerce growth in three months. Even as stay-at-home orders have lifted, box shipments are still up: 7.8% in June over the same time in 2019, according to the Fibre Box Association.

The new indicator: Pants and Suits Index

No office, no events, no reason to really get dressed, right? We all know what lockdown orders and Zoom meetings did to working Americans. Many dressed professionally from the waist up, while sales of pants dropped 13% sales between March and April, according to Adobe Analytics.
If we start dressing up again — or at least buying “hard pants” — we may be on the tail end of the coronavirus and the recession, too.
And almost no one is buying men’s suits. Sales fell 74% year over year between April and June this year, according to GlobalData Retail. It has crushed suit retailers: Brooks Brothers, which made the coat for President Lincoln’s second inauguration in 1865, filed for Chapter 11 bankruptcy last month, following the pandemic fallout. JCPenney and Neiman Marcus also filed for bankruptcy this year, and Tailored Brands recently followed. It owns Men’s Wearhouse, K&G, and JoS A. Bank, each of which saw sales fall between 40% to 78% in early June. (Meanwhile, sales of pajamas jumped 143% in March and April, according to Adobe Analytics.)
If we start dressing up again — or at least buying “hard pants” — we may be on the tail end of the coronavirus and the recession, too.

Old indicator: The Haircut Gauge

Paul Mitchell co-founder John Paul DeJoria championed the idea of haircuts as an economic indicator years ago. He said that if people are spending more on haircuts more often, then surely they had more disposable income. This hasn’t been a go-to indicator, because wages for hairdressers wavered in the aftermath of two major recessions, but “budget hair” did emerge as a thing in 2009.
Today, we’ve got “corona hair,” but it’s not about money anymore. Hairstyles went awry due to forced barbershop and salon closures early in the pandemic. While hairdressers have been allowed to reopen, people are still skittish about such close contact. We may be spending on haircuts now — masks on — because people don’t know when or if they’re going to get the next one. As an economic indicator, this one seems to be broken, because now haircuts aren’t just about disposable income, but rather, about supply and demand.

New Indicator: The Beard Gauge

Men’s beards became a big thing in the past couple years, which had an economic affect: Last year, P&G reported an $8 billion write-down on its Gillette Shave Care line in part because many men stopped shaving.
Now, the razor industry has another problem: corona beard. Sales of blades and razors were down 7.6% for the 19-week period ending July 11, at $866.7 million, according to Nielsen. Meanwhile, electric razors, often used for maintenance and beard grooming, saw a 16% lift to $99.2 million during that time.
Perhaps when men start buying that pack of razor blades again, it will foretell better economic times ahead. However, this isn’t a solid index because there’s a chance that the beard, even unruly pandemic growth, may still be here to stay.

Old Indicator: Dating and Marriage Index

Economic recessions have, for better or worse, been the maker of love or at least longer-lasting coupling. Recessions tended to be good for dating. Match.com had some of its biggest days and weeks following the September 11 attacks and amid the 2008 downturn. Divorce rates, too, have historically dipped during recessions, due to the mindset that tight economic times mean people are less inclined to go it alone.
But the coronavirus again has killed both of these love theories. Today, dating and intimacy is a sketchy proposition amid a pandemic — not to mention the fact that most dating locales like restaurants, bars, and theaters remain closed, limited, or simply awkward. Not surprising, activity on Tinder and Match plummeted when the coronavirus struck this spring.
And as far as married couples go, coronavirus lockdown has meant staying far closer to your partner than normal — working, eating, living, watching Netflix — for some serious 24/7 togetherness. Times like that will either bring couples closer or tear them apart. Counselors and attorneys report being inundated by struggling couples, and now the only thing that’s keeping divorce rates from rising today is the fact that many courts still aren’t dealing with “non-essential” matters like divorce.

New Indicator: The Big Wedding Index

Up until now, the $74 billion wedding industry has been mostly recession-proof, with annual nuptials feeding a steady business for planners, florists, photographers, caterers, and more. The average cost of a 2019 wedding hovered around $33,900, including the engagement ring, according to The Knot.
But those expenditures came to a screeching halt at the start of the pandemic — typically the peak of the wedding season — when tens of thousands of people postponed plans to get hitched. Many opted to reschedule for later this year or next. Others have donned masks for their vows, but the events are typically smaller.
The new wedding theory goes like this: When people begin to spend and plan elaborate wedding celebrations again, consumers might also toast the beginning of better times.


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