The Trash Index: The Latest -- and Best? -- Economic Predictor

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Economics is known as the "dismal science" -- an often-grim analysis of numbers and trends that reveals the hidden workings of society. But when it comes to making predictions about the future, the dismal science occasionally veers dangerously close to superstition. From the hair index to the hemline index, the skyscraper index to the men's underwear index, the business pages are full of tools that analysts have used to understand where the economy has been and guess at where it's going.

One of the most recent attempts is the "Trash Index," developed by economist Michael McDonough. His index explores the relationship between the gross domestic product and the number of train cars full of trash that are shipped to landfills. When the economy is booming, there are plenty of trains, but when it's in trouble, the flow stops.

Accurate, but in Which Direction?

Fundamentally, the trash index makes sense. After all, when a family buys a new couch, they often throw out the old one; ditto when developers construct new buildings. Much of this refuse makes its way to landfills. According to Bloomberg, the index is incredibly accurate -- between 2001 and 2010, there was an 82.4% correlation between flow of trash and the economy.
The trouble is, while the peaks and valleys of the trash index echo the ups and downs of the economy, they don't always match up. Sometimes the trash index moves before the GDP, giving a hint about where the economy is headed. Sometimes it follows the GDP, showing where the economy has been. Right now, for example, the trash index is moving sharply south, suggesting that the U.S. may be headed into a steep recession. The question, of course, is whether GDP will follow.

The Trash Index and Job Creation

Regardless of its predictive ability, one of the trash index's most interesting aspects is the direct relationship that it suggests between consumption and the economy. While much has been made of "job creators," the economic titans who allegedly carry America's future on their shoulders, the trash index suggests that the real job creators might be the middle class. After all, when the middle class fills its homes with products and railcars with trash, they are effectively creating jobs. On the flip side, when they sock away their dollars, the trash trains slow down and the economy suffers.

With the fiscal cliff looming, the question is whether the middle class will keep fueling the economy or start squirreling away money in preparation for tough times. For now, at least, the trash trains seem to suggest that a storm is on the way -- and the real job creators are keeping their money in their pockets.

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The Trash Index: The Latest -- and Best? -- Economic Predictor

By Bruce Watson, DailyFinance


Proposed by economist Michael McDonough, the trash index notes the relationship between a society's GDP and the trash that it produces. As people buy more goods, they produce more jobs -- and more garbage. When trash production goes down, McDonough argues, its a sign that the economy may be doing poorly

Originally proposed in 2001 by Estee Lauder chairman Leonard Lauder, the Lipstick Index holds that lipstick sales go up when the economy is in trouble. Supposedly, women use relatively inexpensive purchases like cosmetics as a substitute for more expensive purchases like clothing or shoes. But, as later evidence has shown, lipstick manufacturers tend to stay in the black, regardless of whether or not the economy is in the red.

This famous index -- closely followed by former Fed Chairman Alan Greenspan -- argues that men tend to hold off on buying underwear when the economy gets skittish. On the flip side, the theory suggests, an increase in men's underwear sales suggest that a recovery is just around the corner.

When you're trying to understand another country's economy, what could be a better measure than McDonald's? The Big Mac Index, proposed in the mid-1980s, looks at how many hours the average worker needs to work in order to buy afford one of America's favorite burgers.

Proposed in 1926, the Hemline Index argues that, as the economy gets better, skirts get shorter. Lengthening skirts, on the other hand, suggest that the economy is on a downward slide. Unlike many other offbeat indices, the Hemline Index has been a largely accurate indicator over its long history.

According to this theory, by the time a news story makes its way to the cover of a business magazine, it is officially out of date. In other words, if the cover of Fortune claims that Apple is in trouble, a savvy investor will buy Apple stock, as a recovery is likely around the corner. History has often proved this theory wrong. To make matters worse, the slow death of magazines suggests that, within a few short years, this index will be little more than a historical footnote.

According to this 1999 theory, new "world's tallest buildings" tend to be erected on the eve of economic downturns. While there is some historical evidence to back up this theory -- for example, ground was broken on the Empire State building in 1929 -- it is often incorrect.

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Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.
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