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.
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.
8 Strange Economic Indices
The Hair Index: What Your Cut Says About the Economy
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.