The Hair Index: What Your Cut Says About the Economy

Economics is supposed to be pretty straightforward, a clear-cut world where math is king and numbers rule. But there are times when math steps aside and magic steps in. As the wizards and oracles of the government and media try to figure out where the country is headed, they often plug in strange, obscure statistics -- like housing starts or new jobs or even lipstick sales -- to draw broad conclusions about the country's financial health.

Not surprisingly, these predictions can veer into over-generalization and wishful thinking, but there are times when they offer genuine insights into the state of the economy. In the case of one recently devised tool, the Hair Index, this kind of out-of-the-box thinking may be just what the doctor ordered.

Basically, the Hair Index looks at the health of private beauty salons as a measure of how the economy is doing. Over the past few years, the data nicely mirrored the arc of the great recession: In 2007, salons reported a 7.71% rate of growth, which fell to 5.5% the next year and an anemic 2.25% in 2009. Over the past two years, however, things have looked up: In 2010 and 2011, beauty salons reported a 5.37% rate of growth each year.

Several indexes look at consumption behavior. For example, the Men's Underwear Index (MUI) -- which was famously used by former Federal Reserve Bank Chairman Alan Greenspan -- looks at men's underwear purchases as an economic indicator. During economic down times, men tend to keep their worn-out briefs and boxers a lot longer than they normally would, but when things get better, they refresh their underwear drawers. Thus, an upsurge in men's underwear sales can be an early indicator of an economic recovery.

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Greg Mulholland, an analyst at Sageworks, a business information firm, notes a key difference between the Hair Index and other consumption measures like the MUI. Whereas most of these measures simply track purchases, the Hair Index is not a simple yes-or-no proposition; salon sales have many variables: "Depending on their economic security, a person can get a trim, highlights, coloring, value-added hair care products, or other services," Mulholland says. A customer who might spend $40 getting her hair cut at the salon in tough times could spend several times that when her personal finances are better.

In other words, the roller-coaster changes in the rate of salon growth don't mean that the number of people going to the beauty parlor wildly fluctuated. Rather, when times were tough, people replaced high-priced hair-care treatments with home versions. Not surprisingly, then, the fortunes of home hair-care products follow an inverse path to those of salons: According to market research firm Mintel, the home hair coloring and perm market trended downward between 2007 and 2008, before shooting back up in 2009 as consumers cut back on expenses.

While the current rate of salon growth is a bit slower than in pre-recession 2007, its general upward trend is promising, says Mulholland. At the same time, home hair care is still doing well, although its rate of growth seems to be slightly slowing. All things considered, it looks like good times are ahead for the economy -- and for America's hair.

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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.